Solutions to Breach of Contract

The transformation of contract law into its modern conception, is based on the Latin principle of ‘pacta sunt servanda’ (‘agreements must be kept’), which dates back in history to the time when trade actually began, the nineteenth century (Elliott and Quinn 2009). Consequently, as developments and technological advancements began, breach of contract was realized to be a major phenomenon in the common law legal system. It should however be appreciated that solutions can be provided to solve problems arising from all forms of agreement by parties of various levels ranging from individuals to corporations to countries, thereby the formation of set out laws which can be adopted freely with the aim of creating legal relations between the said parties (Burrows A.S 2009).

It is also important to guarantee safety and equity in contract formations to avoid superiority of one party over the other, especially in the event of a breakdown of the contract, hence the imposition of the legal interpretations of contract formation.

This paper shall focus on contract management in the United Kingdom, the applicable laws, the solutions to disputes in contract formation, as well as the perceived advantages of the convention for the international sale of goods (CISG) membership.

WHAT IS A CONTRACT?

A contract is an agreement giving rise to obligations which are enforced or recognized by law (Peel, 2007:1). This may be enforced by an action for breach of contract and is either classified as a contract by deed, or a simple contract.

Contract by deed is a form of contract that must be in writing, signed, witnessed and delivered to both parties. All other forms of contract are classified as simple contracts as they could be in writing, oral or by conduct (Duxbury 2006).

Contracts could also be classified as Bilateral, where a promise by one party is exchanged for a promise by the other party (sale of goods), or unilateral, where one party promises to do something in return for an act of the other party (Elliott and Quinn 2009).

FORMATION OF A CONTRACT:

Simple contract formation involves three major elements.

The parties involved must have reached an agreement

They must possess the intention to be legally bound

They must provide valuable considerations.

However, the U.K law establishes the validity of a contract in the relationship between the offer and the acceptance of such an offer, with the appropriate considerations.

OFFER:

An offer is the expression of willingness to contract on specified terms, made with the intention that the contract is binding on acceptance of such an offer (Peel, 2007). An offer may either be express or implied from conduct. Offers may be addressed to one person, a group of people, or the entire public as in the case of an offer for a reward, Carlill v Carbolic Smoke Ball Co. CA 1893. In Patridge v Crittenden (1968), it was argued that the appellant who placed the advertisement, was not guilty of the statutory offence as the advertisement was only an invitation to treat. A genuine offer must always be distinguished from an invitation to treat as the acceptance of the invitation to treat does not constitute a contract. Several instances illustrate the distinction between offers and invitation to treat and will be examined below.

Auctioneer’s call for bids: This is an invitation to treat, and the individual bids are the offers. This is further strengthened by s.57 (2) of the Sale of Goods Act 1979, which states “a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in any other customary manner. Until such announcement is made, any bidder may retract his bid”. Sequel to this, it should be noted that an auctioneers request for bids is not an offer that can be accepted by the highest bidder as illustrated in Payne v Cave (1789). Also, an advertisement to hold an auction is not an offer, but a mere invitation to treat. However, as stated by Warlow v Harrison(1859), an advertisement to hold an auction “without reserve” is an offer to sell to the highest bidder and refusal of the auctioneer to sell to the highest bidder would amount to a breach of contract (Burrows 2009).

Display of goods: under the U.K law, shops are not bound to sell their goods at the displayed price, and a customer cannot insist on buying a particular item on display (Duxbury 2006). The display of such goods is an invitation to treat and doesn’t constitute an offer, the acceptance of which is not a contract, as illustrated in Fisher v Bell (1960). This is further explained by the ruling on Pharmaceutical society of Great Britain v Boots cash chemists limited( 1953) as the contract is only formed when the offer by the buyer is accepted by the cashier, by an exchange of money for the item, and not when the item on display is selected by the buyer.

Advertisements: Considering Partridge v Crittenden( 1968), advertisements are described as an invitation to treat, except in the case of unilateral adverts, where the offer is made to the general public, as in the case of a reward, as seen in Carlill v Carbolic Smoke Ball Co. CA 1893.

Statement of price: Harvey v Facey (1893) and Gibson v Manchester city council (1979), both illustrate that a statement of price on an item is not an offer for that item, but merely an invitation to treat. Clarity in grammar and terminologies should be ascertained.

Tenders: U.K law courts have held that an invitation to tender does not imply an offer to contract with the person, or party with the most favorable tender(Duxbury 2006). However, the invitation may become a unilateral type offer if that was what was intended and it was clearly stated, Harvela investments Ltd v Royal Trust Co of Canada 1985.

ACCEPTANCE

This may be defined as the final expression of assent to the exact terms of an offer (Burrows 2009). An interface must exist between the offer and the acceptance, where what is offered is clearly accepted. It is worthy of note, that a contract is not binding if both parties have not clearly expressed and understood themselves with certainty. In accepting an offer, the party involved must do so unconditionally, without introducing new terms which the offering party has not considered. This is referred to as a ‘counter offer’ and not an acceptance, Hyde v Wrench (1840).

Acceptance will not be complete without an effective communication from the offeree to the offeror, Entores v Miles Far East Corporation (1955). However, an authorized person can accept an offer for the accepting party, as argued in Powell v Lee (1908). Also, in contracts, silence does not amount to acceptance as stated in Felthouse v Bindley (1862), as the offeror cannot exclude the requirement of communication, especially in the case of an unwilling offeree, by insisting that silence shall constitute acceptance (Elliott and Quinn 2009). It should however be noted that the rule that acceptance must be communicated has certain limitations and they are treated below.

For unilateral contracts, there exists no requirement that acceptance must be communicated. Performing the stipulated task constitutes acceptance. Also, in bilateral contracts, it is possible for the offeror to exclude the need for communication of acceptance either expressly or impliedly, as the acceptance in this case takes place by conduct. If stated that the mode of acceptance is by post, the postal rule applies and it follows that acceptance is completed immediately the letter of acceptance is posted irrespective of what happens to the letter in transit, Adams v Lindsell (1818) and Household fire and carriage accident insurance co. Ltd v Grant (1879). The mode of acceptance of an offer, if stated, must be strictly adhered to as no other method can substitute that (Elliott and Quinn 2009). No contract will be formed if any other method is used by the accepting party. Holwell securities Ltd v Hughes(1974) argues this point as it was held that there was no contract as the mode of acceptance was in writing and that had not been received. This is one of the instances where the postal rule does not apply, as the offeror has displaced the rule by stating how the acceptance must be received, Tinn v Hoffmann & Co. (1873) and Yates building v pulley (1975).

Other instances where the postal rule does not apply include where the letter was not posted properly, as argued in Re London v Northern bank (1900), where the letter was not properly addressed, as supported by Getreideimport Gmbh v Contimar (1953), and where it is absolutely unreasonable to respond by post, like on the eve of a postal strike. This is also known as ‘manifest inconvenience or absurdity’ (Duxbury 2006: 11).

In Williams v Carwardine (1833), although there existed a motive of spite, the reward was given even though the information given was not as a result of the reward offer. However, for instances where the acceptance is made for reasons other than the offer, there exists no contract. R v Clarke(1927). One cannot claim a reward for divulging information, being ignorant of the offer of the reward. Also in Tinn v Hoffman (1873), it was stated that where ‘cross offers’ occur, there is no contract, as both offers were made in ignorance of either of the offers, the offers crossing in the post (Burrows 2009).

TERMINATION OF CONTRACTS

Until a contract is accepted, there exists no legal effect. Consequent to the postal rule in the U.K, an offer, once posted cannot be revoked by a faster means. However, as argued in Scotland, such a revocation is permitted on the basis that a revocation of the offer had been made, Wenkheim v Arndt (1873). Other forms in which a contract can be terminated include

Revocation: unless accepted, a contract can be revoked at any time, and this has to be communicated to the offeree, Byrne v Van Tienhoven (1880). Revocation, can also be made by a reliable third party, Dickinson v Dodds (1876). If the offer is unilateral, made to the public, the offer can be revoked by the same means used to make the offer, Shuey v United States (1875).

Time Lapse: as the name implies, a contract can be terminated at the expiration of the fixed period in which the offer was made for, Ramsgate Victoria Hotel v Montefiori (1866). Also, an offer may lapse if the conditions of an offer failed or changed from what it was at the point of the offer as argued in Financings Ltd v Stimson (1962).

Death: U.K law permits acceptance of an offer in the case of death if the contract does not involve the direct personal services of the deceased, or if the offeror was not notified of the death as seen in Bradbury v Morgan (1862). However, the contract will be terminated if the offeree dies before acceptance and no personal representative can accept such offer on behalf of the deceased.

LIABILITY AND BREACH OF CONTRACT

In any contract, the two parties involved (offeror and offeree) are both liable to certain obligations. Any alteration or deviation from such obligations results in a breach of contract. Laws in the U.K have outlined certain areas of contracts that are liable and they include;

Criminal liability: in areas of Environmental protection, adequate health and safety at work, public safety in discharge of contracts, avoidance of public nuisance in terms of noise and litter, environmental pollution in terms of waste management, fumes, gas flares and chemical discharge. It should be noted that the directors of the firm, company or organization are liable to the criminal law and may face imprisonment if the areas outlined above are not considered.

Negligence: this is the failure to take responsible care to avoid loss, damage or injury in the discharge of contracts, an action which is liable. However, it is deduced from The Unfair Contract Terms Act 1977, sections 1- 14, 26- 27, 29, schedules 1 and 2, that;

A person cannot by reference to any contract term or to a notice given to persons generally, or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence

In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of the reasonableness.

Concerning commercial organizations, the heads are perceived to be ‘experts’ in their respective fields and are usually liable for the conduct of their employees. It is however stated that for liability to be enforced, the negligence must have caused damage and the injured or affected party has to prove negligence on the part of the other party.

Breach on the other hand is an act of breaking a law, agreement or code of conduct (Oxford English dictionary, 10th edition). A contract is breached when without lawful excuse, one party fails to perform its obligations as stated in the contract (Mindy Chen- Wishart , 2008). When this happens, the innocent party is at liberty to sue for damages. In more serious cases, also known as ‘repudiatory breaches’, the innocent party may treat themselves as discharged from the contract alongside claiming damages. Here, the innocent party also has to communicate to the other party about its decisions and is required to state clearly that the contract breaking party has shown that they can no longer fulfill their part of the contract (Duxbury, R.2006)

DISCHARGE OF CONTRACT

There exist many ways in which a contract may be discharged but there should be an agreement between the affected parties and must be at a point when all the rights and obligations agreed in the contract come to an end. A contract may be discharged by;

Agreement: here, the parties involved must contractually agree on the conditions of termination and these may be influenced by the expiration of the stipulated contract time, or by giving due notice. Oral contract discharge, on agreement is also welcome, but any new agreement or variation in the original agreement will require evidence in writing, Berry v Berry (1929).

Performance: on completion of obligations in a contract, the contract is discharged. This performance must be accurate and exact according to the contract specifications. In contracts involving milestones, a contract can be discharged by a guarantee on the completion of key parts. Also, if agreed by the involved parties, the contract may be discharged by phased payments on delivered jobs as well as partial completion of the contract. It should be noted that the Sale of Goods Act 1979 and the Sale and Supply of Goods Act 1994 contain laws protecting both parties in respect of performance in discharge of contracts.

Force Majeure: insertion of a contract termination clause into the contract can lead to suspension or discharge of the contract and this will exclude liability for consequential loss. This clause is usually based on unforeseeable circumstances which are usually manmade. The contract is discharged in the event of war or civil unrest, imposition of government restrictions, impositions on imports and exports, breakdown of machinery due to accident or fire, amongst others.

Act of God: in the event of Earthquakes, tsunamis, flood, epidemic, events which occur independent of human intervention, a contract may be terminated without liability.

A breach of contract can also lead to a discharge of the contract (Catherine 2009).

CONTRACT DISPUTE RESOLUTION

In contracts, the major dispute that occurs is as a result of a breach of contract. Several factors such as clarity of the contract, the timing of the contract, the legislation and Government policies at the time of the contract and its changes during the contract, may influence the breach of contract. Conviction in cases of breach of contract not only makes the offender liable, but may involve paying compensation for personal injury or loss arising from the breach (E. Peel, 2007:992). However, recognized solutions to resolve these contract disputes have been documented and are stated below.

Litigation: this involves a legal action involving the two parties (offeror and offeree), in the form of a law suit. The intended outcome of this legal action is ‘Damages’ payable by the losing party to the innocent party. Damages’ are a financial award that compensates the innocent party for losses they must have incurred as a result of the breach. The innocent party is entitled to damages that tend to reinstate them in the position they should have been if the contract was not breached (Elliott C. and Quinn F. 2009). In contracts, an action for damages must be distinguished from an action for an agreed sum where in the latter, the action is a claim for debt and not for damages as argued in White and Chatter (councils) Ltd v McGregor( 1962).

In litigation, several other actions are obtainable such as Quantum meruit, a claim for a case where one party is prevented from performing obligations as a result of breach, an injunction restraining a party from performing an action in a contract. However, limitations in bringing litigation proceedings in respect of breach abound and are supported by the limitations Act 1980 (s.8, 11, 28, 32 and 38) (Duxbury R. 2006).

Negotiations: majority of disputes involving contracts are settled out of court (Chen-Wishart M. 2008:522). This is as a result of the financial involvement, lengthy time, stress and uncertainties associated with litigation. Well advised parties, in the event of a breach will resolve their differences by awarding the claims to the innocent party, though for a reduced sum or with deductions. These deductions cater for the risk of going to court and avoidance of the fact that the claim may not be established. However, if the contract breaking party is facing insolvency, with proper negotiations, the innocent party may be forced to accept a much lesser sum, with the hope of more payments in the future, rather than losing it all as an unsecured creditor (Chen-Wishart M. 2008:522).

INTERNATIONAL SALE OF GOODS

Consumer protection while contracting businesses was the major problem faced by courts as contracts developed over the years. Observing that businesses were richer and more influential than their consumers, thereby employing the services of good lawyers, the courts began to seek ways where the buyer/ consumer got a fair deal while contracting businesses and this led to the sale of goods act (Elliott C. and Quinn F. 2009:390).