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Contract Formation MSc/LLM
Today • Some Housekeeping • Contract formation
• • Last week Referencing Wiki profiles Set formative homework. Summative assessment (will discuss this directly on 25 October)
Update • 76 registered students • If you are not registered and you intend to come on the course, you must resolve this immediately. We are shortly entering the “late registration” period, during which registration becomes increasingly difficult, and then impossible.
Networking • . . . now 23 wikis (one of which is mine…) • Well done to those of you who have done it… • …and the rest? !! • Student email
Access • Some students have struggled with accessing the sessions and recordings through Blackboard even though they are registered. It has been to do with trying to access blackboard through the portal. • Best way: – Student Channel http: //www. salford. ac. uk/students Then click the BB link:
Fundamentals of Construction Law • Quite narrow focus. • No tort, just contract. • Limited focus on specific standard form contracts, more the principles that underlie and inform them. • Purpose to facilitate students in understanding the true legal nature of commercial construction relationships. • First thing to look at is the very basic question of…
Contract What is a contract?
A contract is… • “A promise or set of promises the law will enforce” (definition from online contract text book in Westlaw “Chitty on Contracts 32 edn”, derived from Sir Frederick Pollock, 1876) • Usually bi-partite • Based on agreement • Based primarily on common law principles So, “based on agreement” – any issues?
It is impossible to know for certain what anyone is thinking
Agreement - Problem • Whether two people agree about anything is, on a philosophical level, unknowable. • Commerce cannot function in such an uncertain context. • Solution?
Agreement - Solution • Law takes a pragmatic solution. • Adopts an objective viewpoint. Looks at the acts of the individuals, and the documents they produce and determines agreement, externally. • Specifically – what the individuals claim to have been thinking or intending at the time is nearly always entirely irrelevant
How objectively identify “agreement”? • Usually done by identifying an offer by one party which is unequivocally and fully accepted by the other party
e. g… • Manufacturer of machine tools sent quotation for 75 k, subject to Manufacturer’s terms, including “fluctuation clause” [i. e. final price may be higher if prices have risen by the time of delivery owing to inflation] • Purchaser sent back order referring to Purchaser’s terms - no fluctuation clause. Tear off acknowledgment slip for signature, accepting order “on the terms and conditions thereon” • Manufacturer signed and returned the acknowledgement slip with covering letter stating delivery to be “In accordance with our revised quotation” • Machine was delivered. Manufacturer wanted £ 75 k plus £ 2 k fluctuation. Were they entitled?
Battle of the Forms • Not entitled. • The critical act was considered to be signing the endorsed return slip, which amounted to acceptance. • The court decided that “in accordance with our revised quotation” should not be considered a counter offer in these circumstances. • Butler Machine Tool Co v Ex-cell-o Corp (England)  1 W. L. R. 401
Find the killer “…the counter-offer kills the original offer. ” Trollope & Colls Ltd. v. Atomic Power Constructions Ltd.  1 W. L. R. 333, per Megaw J at 337 This does make sense. It’s all about what you agree, if you haven’t agreed, then why should you be bound?
Think about the process
e. g. “I will supply 5 kgs of 2 cm galvanised nails for £ 10” “Thanks. I’ll take 5 kgs of 3 cm galvanised nails for £ 10” NB this is a typical lawyer’s trick!
Objective Approach • Pragmatic solution to philosphical problem: Agreement = an offer which has been unequivocally accepted
Generally Communication Vital • To form a contract, usually necessary for the person making the offer to be told that the offer is accepted. • This fits with the objective approach to establishing if there is an agreement • What other effect would there be if the person making the offer did not need to be told that the offer was accepted?
… • If not, people could be bound to do things they never agreed to do, and are now unable to do. – E. g. I make an offer to sell you my Brompton bike for £ 50. I hear nothing, I sell it to someone else, then you come and tell me you in fact accepted my offer (? ? !!!!!) • Hence the general rule “silence is not acceptance” • Case usually cited – Felthouse v Bindley 142 E. R. 1037
Felthouse v Bindley • Nephew owned horse. • Uncle offered to buy the horse saying “If I hear no more from you I shall consider it mine”. • Nephew didn’t respond. • Nephew put horse into auction, where it was sold to someone else. • Uncle unhappy because he had wanted the horse, so he sued the auctioneer for selling a horse that allegedly belonged to him, without authority.
F v B • Uncle had to establish that the horse was his, and that auctioneer therefore was wrong to sell it. • Court said that Uncle could not assume that the nephew’s silence could equate to acceptance.
Silence is equivocal
Stopping there for a moment… • I’m referring to cases, but what is the relevance and point of these for you? • Two points: – Cases can be the substantive source of applicable law on a particular point. They expound a principle of law. Then we look for House of Lords, or Supreme Court etc. – Cases provide examples of instances where contentious things happened and law was applied to facts. That is why we are interested in looking at a range of, e. g. High Court, cases on the same general issues. To see if situations analagous to our own have happened, and if so how those were decided.
Another way to find (new) cases • http: //www. bailii. org/ • Quick, free, full text (no commentary) • To keep an eye on developments you can scan the TCC, Court of Appeal and Supreme Court outputs
Rough and Ready Resource Repository When you get to the full text of the case you want, save that to your own folder (sensibly named), but you can also copy this bit, and paste it into a spreadsheet, and you can then make notes about the case and what it says etc.
Also briefly Gives initial indication of whether the case has been approved Links to brief summary, and list of cases citing this case (so you can follow the trail) Links (if hyperlinked like this one) to full text of judgment
Checking up The case has positive judicial treatment, and some recent cases. You can check further by looking at the history of those cases.
Journey into authorities • Robophone Facilities Ltd v Blank  3 All E. R. 128. Good, because Court of Appeal. • Christopher Michael Linnett v Halliwells LLP  EWHC 319 (TCC) (good because shows relatively recent application of the principle, but only High Court so not binding, rather applying precedent. However, if you look at it…
Validation 45 So far as the contractual position between the adjudicator and Halliwells is concerned, first, I accept that Halliwells' silence following the adjudicator's letter of 28 May 2008 did not amount to acceptance. The general principle derived from Felthouse v. Bindley and applied by the Court of Appeal in Allied Marine Transport Ltd v. Vale de Rio Doce Navegacao SA (“The Leonidas D”)  1 WLR 925 at 927, 937 and the House of Lords in Vitol SA v. Norelf Ltd  AC 800 at 812 is that acceptance of an offer cannot be inferred from silence, except in exceptional circumstances. In my judgment, there was nothing exceptional in the circumstances here and there was nothing that gave rise to any express or implied obligation on the part of Halliwells to speak. Christopher Michael Linnett v Halliwells LLP  EWHC 319 (TCC), per Ramsey J at para 45 For a discussion of “exceptional circumstances” see paragraphs 74 to 76 of D P A S Limited v The Commissioners for Her Majesty's Revenue & Customs  UKFTT 676 (TC) – e. g. if offeree had petitioned the offer, if there was history of previous course of dealing etc.
Interesting to track down • If you look at the Norelf case, you find it is a House of Lords decision. It is an “easy” one, because there is only one reasoned judgment, and the other 4 judges agree. At p 812, Lord Steyn says: “While the analogy of offer and acceptance is imperfect it is not without significance that while the general principle is that there can be no acceptance of an offer by silence, our law does in exceptional cases recognize acceptance of an offer by silence. ” So, the case is good, because it confirms (at HL level) the general principle that silence cannot be acceptance, except in exceptional circumstances.
Point of that? • To provide an insight into how you would go about checking what “the law in force” actually is, starting from a known case. • Other routes, e. g. Chitty on Contracts (Westlaw)
Sometimes… … despite the general position that acceptance has to be communicated verbally, sometimes that verbal communication of acceptance of offer is not necessary. Can you think of any situations?
Acceptance by performance • Two common situations: – Unilateral contract – When you proceed to act in accordance with terms you have discussed in detail.
Acceptance by Performance 1
Carlill v Carbolic Smoke Co  1 Q. B. 256 • Company offered £ 100 reward if you used their product and still contracted flu. • Mrs C did buy and use the product as specified but she still got flu. • She sued when they refused to pay out. • They argued it was merely advertising “puff”. • They lost. It was unequivocal offer to the whole world, open to be accepted by performing their part of the bargain, as Mrs C had. • Still crops up, and if you check it you can find pretty recent cases (not construction) where it has been applied.
Acceptance by performance 2 – When you proceed to act in accordance with terms you have been discussing, e. g. : Brogden v Metropolitan Railway Co (1877) 2 App. Cas. 666 Discussed terms re supply of coal Drew up document. Never properly executed. Started supply. Railway co then complained, orders short or late Supplier denied there was a contract.
Apply to context
Jayar v Impex Telephone agreement – supply 47 tonnes of gum arabic at $3. 40/kg. No mention of additional terms. Seller sent own terms (including arbitration clause, and claims time limit clause), stating that the terms needed to be signed and returned. Buyer did not return terms. Dispute arose re quality of gum arabic. If seller’s terms were incorporated, buyer would lose right to make claim re quality, and would owe seller nearly $200, 000. Seller’s proposed terms much more stringent than those referred to orally. To get them to bind the buyer, would be a new contract for which the “plainest evidence of assent” would be required (per Rix, J, p. 445)
Assignment • Contract formation is a critical part of the assignment. • Looking at the facts to try to work out what is happening, and how it might fit with processes of contract formation is key aspect. • Also, looking for examples of similar situations in the case law, and examining why they happened the way they did. • It is a thoughtful, reflective process. • Also – remember – a critical part of determining whether a contract has been formed is establishing the basis of the contract (i. e. the terms).
So • Agreement established objectively • Use unequivocally accepted offer • Acceptance usually must be communicated, so silence generally not acceptance: – One exception, performance [in right circs] – Another exception [nowadays not really relevant] postal rule (e. g. Henthorn v Fraser  2 Ch 27)
When is an offer not an offer?
When is an offer not an offer? • Two main circumstances: – When it is a preliminary approach to see if the other person is interested – “invitation to treat” – When it is too uncertain.
Certainty • Must be possible to ascertain at the time of contracting either exactly what the contract demands, OR a definite mechanism for getting there • Old example – Guthing v Lynn 109 E. R. 1130 – I’ll give you £x pounds for the horse now, and another £y “if it is lucky” • Recent construction example: Vinci Construction UK Ltd v Beumer Group UK Ltd  EWHC 2196
So far: • We have an offer: – Which is not an invitation to treat – Which is sufficiently certain • We have acceptance of the offer – Probably expressly communicated – Possibly evidenced by performance • Still missing a few things…
Parties etc • Both parties to the contract must be legally capable of entering a contract • The parties must intend to be legally bound, i. e. to enter into a legal relationship requiring performance
Parties etc • Both parties to the contract must be legally capable of entering a contract e. g. there are limits regarding contracts with: – People under 18 [Family Law Reform Act 1969] – People who lack mental capacity [Mental Capacity Act 2005] – Companies, Associations, etc • The parties must intend to be legally bound, i. e. to enter into a legal relationship requiring performance – Sometimes if arrangements are between friends etc then there may be no intention – In commercial context “subject to contract” generally indicates that parties are not yet in contract.
Final Element • Essentials: – A definite offer which can be ascertained with certainty – Acceptance of that offer – Parties legally able to contract – Parties intending to be bound – CONSIDERATION
Consideration • The pain for the gain, or less colloquially: • ‘A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given suffered or undertaken by the other. ’ per Lush J, Misa v Currie (1874 -75) L. R. 10 Ex. 153, at p. 162
Turns a promise into contract • Promise – moral obligation, but no legal avenues open if the promise is broken • Contract – legal obligation
Consideration not usually problematic • In commercial situations generally no problem e. g. – The builder does the work – the client pays for the work • But problems can arise…
Problems with consideration • Changing the price of an agreement – doing the agreed job for more than the agreed price generally not enforceable, since no consideration for the price change, however… – Williams v Roffey Bros * [renegotiated agreement to do contractual work for more cash was enforceable, because it reduced liab for late completion] • Past consideration – is no consideration sometimes this type situation may bring in the entirely *Note, however that of “economic duress” of which may render such contracts separate doctrine unenforceable – see Adam Opel GMbh v Mitras Automotive  EWHC 3205
Last thing • Privity of contract • Basic rule is that only the maker and accepter of the unambiguous offer backed by consideration can sue on it.
Privity of Contract Builder Professional Appointment – Reciprocal Obligations Designer D & B Contract – Reciprocal Obligations Client No contractual duties owed Solution?
Two Contractual Solutions Builder Professional Appointment – Reciprocal Obligations Designer D & B Contract – Reciprocal Obligations Client Collateral Warranty – to say yes I have designed the building properly and you can sue me in contract if I am in breach – consideration either nominal – £ 1 – or unnecessary – done as a deed Contracts (Rights Against Third Parties) Act 1999 - permits [but does not require] parties to write into their contract a term which does allow 3 rd parties to sue.
Essentials of Contract Formation • Essentials: – A definite offer which can be ascertained with certainty – Acceptance of that offer – Parties legally able to contract – Parties intending to be bound – Consideration
Form • • Generally no stipulation as to form Can be oral – Problems? Usually written Sometimes must be by deed: – “All conveyances of land or of any interest therein are void for the purpose of conveying or creating a legal estate unless made by deed. ” – S 52(1) LPA 1925
Example • Letter of intent (on Blackboard). Signed by the Contractor. £ 250, 000 cap. • Started on site in mid July 2007 • Received valuations from Employer totalling over £ 500, 000. Paperwork refers to “the contract”. • Increasing complaints about workmanship etc. • Until, on 15 November 2007…
Next “We hereby give you notice in accordance with paragraph 4 of our letter of intent dated 5 June 2007, that no further work is to be carried out under that letter. ” If the relationship incorporated the JCT terms, there were additional steps and consequences to take/face. If it was just a simple contract on LOI, then that letter worked, and there was a fee cap. So which was it?
Answer… • • • Simple contract. Clear offer setting out terms. Clear conditions on the offer. Clear cap, clear method of termination. Contractor had also signed and returned it • Also: – Contractor knew terms and could have refused to work until contract signed, or cap extended etc. – Reason it never signed “too busy”….
Construction illustrations • Useful for seeing how these messy situations can be made sense of. • Diamond Build v Clapham Park Homes  EWHC 1439 (TCC) http: //www. bailii. org/ew/cases/EWHC/TCC/2008/143 9. html • Twintec v Volkerfitzpatrick  EWHC 10 (TCC) http: //www. bailii. org/ew/cases/EWHC/TCC/2014/10. html (paras 17 to 47)
Remember • This Thursday, at 18: 30 BST, in the LLM/MSc module. • Legal Library Resources.
Next week… • Early stage liability – e. g. costs of tendering etc, are they recoverable or not? What happens if you don’t form a contract? • Reading in LP 2 (and see next slide). • Don’t forget: – Wiki Profile – Referencing/upload test…
Cases for next week • Blackpool and Fylde Aero Club Ltd v Blackpool BC  1 WLR 1195, CA • William Lacey (Hounslow) Limited v Davis  1 WLR 932 • Turriff Construction Ltd and Turriff Ltd v Regalia Knitting Mills Ltd (1979) BLR Vol 9, 20 • Marston Construction v Kigass (1989) BLR Vol 46, p 109 • British Steel Corporation v. Cleveland Bridge and Engineering Co. Ltd.  1 All E. R. 504 • Regalian Properties Plc v London Docklands Devpt Corporation  1 WLR 212 • Benedetti v Sawiris  UKSC 50. [just read the principles, para 10 etc]