Blo1105 Business Law- Contract Between Assessment Answers

1. Josie makes a living painting watercolour pictures and selling them from her studio located in her house.

On Sunday 19 February, Sam visits her studio and admires a painting of sunflowers. The price tag indicates it is for sale for $900. Sam offers Josie $700 for it, but Josie says that she cannot accept less than $800.

Sam indicates that would be a good price but asks Josie to hold the painting so his wife could also look at it and approve his decision. However, Sam points out that the earliest his wife could do so would be the following Tuesday, 21 February. Josie said that would be fine and gives Sam a form that reads:

I, Josie, offer to sell Sam one framed picture of sunflowers for $800. This offer shall expire at midnight on Tuesday 21 February.

Signed: Josie

The following day, Monday 20 February, Wendy, an art enthusiast, visits Josie’s studio and is very impressed by the same painting. Without haggling over the price, she buys the painting for $ 900 cash and takes it away with her.

The same day, Josie phones Sam and leaves a message on his answering machine saying that the painting has been sold for $900. Sam does not return the call, apparently unable to retrieve any messages due to the machine being faulty for the past few days.

On Tuesday 21 February, Sam told his wife about the painting and she is very enthusiastic about it. She tells Sam to go ahead and buy it for $800. At 10 am that day Sam telephones Josie and after only managing to greet her, he is cut off as Josie’s telephone goes dead due to a flat battery. Sam is unable to continue the conversation and Josie does not attempt to call him back. Instead, an hour later, Sam decides to post a letter to Josie formally accepting Josie’s offer. The letter arrives in the mail at Josie’s house on Thursday, 23 February. 

Required

2. The rule in Pinnel’s case expresses the requirement for consideration in simple contracts. Generally, the rule works sensibly and fairly, but there are some situations when it does not.

Discuss this statement, and explain the circumstances in which courts see it as unfair to apply this rule.   

Answers

1. Issue 1

Was a binding contract present between Sam and Josie?

Rule

An agreement, which achieves all the elements which are required by the law, can be deemed as a contract and has legal validity, so long as it does not contain illegal terms or is not based upon illegal aspects. A contract denotes a lawful and binding agreement being drawn, whereby in exchange for a promise, consideration is paid and is drawn between two people or a higher number of people. To provide legality to a contract, it needs to have six distinctive elements, and certain elements have to flow in a nature and cannot be present before a particular element has been passed. So, firstly, an offer has to be made, followed by an acceptance, and has to include the other elements of intent, clarity, consideration and capacity and these last four elements can be interchanged in order, though, have to be present.

An offer is the first stage of establishing a contract. An invitation to treat is different from an offer and an invitation to treat takes place before an offer is made. It is not necessary that an invitation to treat is present in each case, but to form a contract, an offer is of utmost importance. An offer shows eagerness to form legal relations and an invitation to treat shows eagerness to initiate negotiations. When an advertisement is given in a magazine or if the same is given in a newspaper, it is treated as an invitation to treat. However, where the newspaper contains such terms, which can, through performance of the stated task, led to formation of a contract, the same is deemed as an offer, as was upheld in Carlill v Carbolic Smoke Ball Company owing to the unilateral offer.

However, when the advertisement does not contain any such terms, it is deemed as invitation to treat. In the same manner, he goods kept on the shelf of a shop are considered as invitation to treat. And as per Partridge v Crittenden, the individual is not required to sell the products kept on the shelf. An offer in such cases is made when the person picks the product and reaches the cash counter to purchase the same. After making an offer, it can be revoked till such time where the acceptance has not been received. It has to be revoked through proper notice and if the same is not brought to the accepting party’s notice, it is invalid revocation.

After an offer, it needs to be accepted by the party to which the offer was made, or by their representative. The offer needs to be accepted without any modification or alternation or else the same would be deemed as a counter offer as was held in Hyde v. Wrench. And in such cases, the original offer expires due to the counter offer. The date on which the acceptance reaches the offering party, is deemed as the date of acceptance. An exception to this is the postal rules, where the date of sending acceptance through letter is the acceptance date and the date of receipt is irrelevant. This rule was upheld in Adams v. Lindsell, where the date of receipt resulted in contract formation.

The contract needs to have a valid consideration having a value which can be deemed as economic. And the same has to be present and cannot be past. This has to be followed by clarity in terms of the contract. The parties also need to have the contractual capacity, whereby they should have attained legal age and be of sane mind. Lastly, the parties should have the intention of forming lawful relationship, without any undue influence or duress.

Application

The painting in the given scenario would be deemed as an invitation to treat based on the case of Partridge v Crittenden. And so, Josie is not bound to sell the same. The offer was formed when Sam wrote the terms on a piece of paper on 19^th Feb. and the same was set to expire on 21^st Feb. Upon receiving interest from other party, Josie cancelled the offer on 20^th Feb. Though, this offer did not reach Sam, so would not be deemed as properly communicated, hence, the offer was not revoked. And due to the postal rules, the offer would deem to be accepted by Sam on 21^st Feb. this contract had consideration element of $800. The other elements are assumed to have been present. And as a result, a contract was indeed formed.

Conclusion

Hence, a binding contract present between Sam and Josie.

Issue 2

Can the contract be stated to have been breached and as a result, does Sam have any rights?

Rule

In case where the promise is not upheld by one of the contracting parties, it is deemed as a breach of contract. And this enables an individual to apply for damages for the ensuing breach. The reason why damages are awarded was given by the House of Lords in the leading matter of Addis v Gramophone. By awarding damages, an attempt is made to put the aggrieved party in the position where they would have reached after the contract was duly performed.

The breach of contract enables an individual to apply for monetary compensation, as damages or specific performance, amongst the other things, as equitable remedies. In Lumley v Wagner, the machines had to be delivered by the defendant due to the specific performance order of the court.

Application

The promise was breached due to the sale of painting to Wendy by Josie. Hence, Sam can apply for monetary compensation or could ask the court for a specific performance order.

Conclusion

To conclude, due to breach of contract, Sam is eligible to claim remedies as cited above.

2. Penny v Cole, famously known as Pinnel’s case, is amongst the most controversial cases with regards to the contract law and relates to the element of consideration, more particularly, to part payment of consideration. In Pinnel’s case, the court held that through the part payment of the debt which has been owed, the obligation of the complete amount cannot be extinguished. In a casual manner, these requirements seem to be quite fair. Though, it proves to be quite unfair in reality. A discussion has been carried over the unfairness of this rule and the resulting changes, which have been brought to this rule, to remove its unfairness.

For £8 10s, a case was initiated by Pinnel against Cole for the amount of debt as a result of the bond. Cole had made an argument that he had paid £5 2s 6d to Pinnel on his request, even before the debt became due. And that this amount was the full satisfaction of the amount of debt owed. It was held by the judges of this case that Pinnel had the right to recover the total amount, even though the parties had mutually decided to accept a less amount. The part payment of the debt could not be held as a valid consideration by the Court of Common Pleas, in a manner that the remaining debt could be foregone, till such time, the part payment had been made.

The rule given in this case has been used in several cases, and one of such matters is that of Foakes v Beer. The plaintiff owed the defendant a sum of £2,000. An agreement was attained later one which stated that the installments could be paid afterwards, once a payment of £500 had been made by the plaintiff. The issue remained silent on the interest with this payment, even though it was a common parlance. For this payment of interest, the defendant made a claim against the plaintiff. Based on Pinnel’s case, the plaintiff was required to pay the amount of interest. If the case is seen in detail, it shows how unfair the ruling of Pinnel is. This is because it was not the fault of the plaintiff that the amount of interest was not discussed. Something which has not been discussed could not be claimed upon later. Moreover, when the contract stated the sum to be paid, claiming an amount beyond the amount stated is unfair for the party. This depicts the unfairness of applying the Pinnel’s case.

Such cases are the reasons why the Pinnel’s case ruling has been criticized over and over. One of the reasons of criticism is that through the application of this rule, the creditors can make a full back turn over the promise which has been made by the parties. In the matter of Couldery v Bartrum, the English common law allows the creditors to accept any amount in satisfaction of the debts. Though, in this case, the complexity of common law put a restriction over the individual from making an acceptance of the 19 shillings and 6 pence in the pound.

Such criticism led to exceptions being drawn against the ruling of Pinnel’s case. Hence, payment of a reduced amount in another currency or another place has to be deemed as legal enforceable discharge of debt when the same is provided at the creditor’s request. Another exception to this rule is fraud of a third party. Also, when a promise has been made for the payment of debt to the creditor in a reduced amount, which is supported with different sort of payment, the debt would be deemed to have been paid in full.

The most substantial exception, which removes the unfairness of Pinnel’s case ruling, is given in the doctrine of promissory estoppel. Hughes v Metropolitan Railway Co was the case where the promissory estoppel was established for the very first time. In Hughes, a six months notice was served upon the tenant through the landlord and this notice required the tenant to undertake certain repair work and if the same was not done, the tenancy would be ended. Negotiations started between the landlord and tenant while this notice period was going on. The theme of these negotiations was to transfer the freehold of the property to the landlord only. As these negotiations were underway, the tenant became confident that he would be successful in attaining the freehold of the land and he did not undertake any of the required repair work. The negotiations could not be successful, as expected and the tenant was served with an eviction notice for not upholding the previous notice. Taking a variation from the Pinnel’s case, which would have resulted in the eviction of the tenant, the court held that during the time period of the negotiations, the six months period had to be put on halt. As per the final order of the court, the landlord was unsuccessful in evicting the tenant.

Even though this decision was given long back, the same was not adopted openly. Hence, this principle had a rebirth in the matter of Central London Property Trust Ltd v High Trees House Ltd. In this matter, the defendant had rented flats from the plaintiff at £2,500 as ground rent. Due to the time of war, the flats could not be fully rented out which resulted in defendant incurring losses. After an agreement between the two parties, the rent was reduced till the conditions got better. Once, the conditions improved after the war was over, the plaintiff sued for increased rent for the period after the war ended.  The court held the same view.

This case is not famous for its decision but for the obiter statement made by Denning J. he stated that in case the plaintiff would have applied for an amount for the period in which the hardship continued, where the agreement was drawn to reduce the rent, then the same would not been granted to the landlord, as a result of the principle of promissory estoppel. The reason for stopping the landlord from claiming the promised reduced amount is so that the specific rights given to the tenant, through the later drawn contract, are not lapsed, especially because the tenant had relied on these reduced terms and on the notion that the previous promise would not be enforced.

Had this doctrine had been applied in the case of Foakes v Beer, the unfairness of the decision of that that case would have been removed. Applying the promissory estoppel in this case, Beer would have been stopped from claiming the interest as the same was not a part of the agreement drawn later on. Though, one of the crucial elements to establish a case of promissory estoppel is to show reliance over the promise made. And so, Foakes would have to show that he relied on this term and had genuinely no idea that the interest was payable later on. The rationale behind this is that till a person relies upon a term, the unfairness cannot be established.

To conclude, the Pinnel’s case is although landmark case with regards to part payment of the consideration amount being not a full discharge of the obligations. However, the same has resulted in the agreements drawn subsequently, as being unfair. And this is evident from the verdict of Foakes, where this ruling was applied. Hence, the exceptions brought to remove the unfairness of this rule are not only justified but quite significant as well.

Bibliography

A. Articles/ Books/ Reports

Abbott K, Pendlebury N and Wardman K, Business law (Thompson Learning, 8^th ed, 2007)

Andrews N, Contract Law (Cambridge University Press, 2^nd ed, 2015)

Blum BA, Contracts: Examples & Explanations (Aspen Publishers Online, 4^th ed, 2007)

Carter JW, Elisabeth Peden and Greg Tolhurst, Contract Law in Australia (LexisNexis Butterworths, 5^th ed, 2007)

Elliott C and Quinn F, Contract Law (Pearson Education Limited, 9th ed, 2013)

Furmston M and Tolhurst GJ, Contract Formation: Law and Practice (Oxford University Press, 2010)

Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31^st ed, 2012)

Macdonald E, and Atkins R, Koffman & Macdonald's Law of Contract (Oxford University Press, 8^th ed, 2014)

Poole J, Casebook on Contract Law (Oxford University Press, 2016)

B. Cases

Adams v. Lindsell (1818) 106 ER 250

Addis v Gramophone [1909] AC 488

Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

Couldery v Bartrum (1881) 19 Ch D 394

Foakes v Beer (1884) 9 Apps cas 605

Hughes v Metropolitan Railway Co [1877] UKHL 1, [1877] 2 AC 439

Hyde v. Wrench (1840) 3 Beav 334

Partridge v Crittenden [1968] 1 WLR 1204

Penny v Cole [1602] 5 Co. Rep. 117a

C. Legislations

Contract Law

D. Others

E-Law Resources, ‘Central London Property Trust v High Trees House [1947] KB 130 High Court’ (2017) <https://www.e-lawresources.co.uk/Central-London-Property-Trust-v-High-Trees-House.php>

E-Law Resources, ‘Hughes v Metropolitan Railway (1876-77) LR 2 App Cas 439 House of Lords’ (2017) <https://www.e-lawresources.co.uk/Hughes-v-Metropolitan-Railway.php>

Swarb, ‘Central London Property Trust Ltd v High Trees House Ltd: KBD 1947’ (2016) <https://swarb.co.uk/central-london-property-trust-ltd-v-high-trees-house-ltd-kbd-1947/>