Contract Law: Jakes Contract with Hairods - Case Study Example

1. Jake’s Contract with Hairods The factual scenario raises various issues pertaining to contract law in particular the following Whether Hairods are in breach of contract for terminating the supply agreement with Jake; 2) If so, what remedies Jake can recover from Hairods; 3) Whether Jake is owed payment in respect of the goods delivered under the February consignment; and 4) Whether Hairods can claim that the contract is void on grounds of mistake or illegality. With regard to the contractual agreement with Hairods, this was a concluded agreement and therefore theoretically Hairods’ termination constitutes breach of contract as revocation of contract is only valid if communicated to prior to acceptance.1 There are a variety of remedies available at law for breach of contract and the most common form is a claim for damages for loss caused by breach. To succeed, Jake would have to be established that loss was suffered as a result of the breach and that the loss was not too remote. The principles of remoteness were set out in the case of Hadley v Baxendale2, which provided that that following losses are recoverable: 1) All losses flowing as a natural consequence of the breach; and 2) All losses which were in the contemplation of the parties at the time the contract was made. This rule has been interpreted to mean that only loss which is within the reasonable contemplation of the parties can be recovered3. Any party claiming breach of contract would have a duty to mitigate loss also4. However, an alternative remedy may be specific performance. The basis of specific performance is rooted in the premise that “it would be unjust to permit the defaulting party simply to buy out the injured party with damages5”. An order for specific performance requires performance of the contract and although generally restricted in practice due to the notion of mutuality of obligations, which will not therefore be appropriate in the current scenario as Hairods have terminated the contract. At present it is evident that Hairods have not paid for the goods that were delivered in the February batch as per the contract, which raises ownership issues. The legal rules for determining ownership of goods in sale of goods contracts are covered by the common law and statute. The Sale of Goods Act 1979 (SGA) sets out legal presumptions regarding ownership, however these presumptions are subject to the freedom of contract principle6. Under the SGA, ownership depends on whether the goods are ascertained or unascertained goods7. If there is an express provision that the property was to pass to the buyer at a particular stage, that provision could not, in the case of a contract for the sale of unascertained goods, come into effect until those goods were ascertained under section 16 of the Sale of Goods Act 1979 (SGA). Section 18 further provides also that where goods are in bulk and not ascertained they cannot pass to the buyer. The time for determining whether goods are specific or unascertained goods is that at which the contract is made8. If the contract is for goods which are “identified and agreed upon” at the time the contract is made, then the SGA it will be a contract for ascertained specific goods. In the current scenario, whilst the goods were going to be delivered in two batches, the quantity appears to be clearly defined and was identifiable and therefore the agreement between Jake and Hairods is most likely to constitute a good for ascertained goods. Additionally, the general rule set out under section 17 of the SGA provides that property in goods pass when the parties intend it to pass, thereby highlighting the freedom of contract principle9. With regard to the current scenario it is unclear whether express provisions have been contractually agreed regarding ownership. Section 20A of the SGA provides for the buyer to obtain an undivided share of goods in unascertained goods from an identified bulk. Section 20A applies to the goods when the buyer pays for the goods, which in the current case is 60 day credit period. Accordingly, the passing of ownership and risk will be determined by reference to what the parties have agreed or alternatively by reference to ss.16-19 of the SGA. With reference to section 17 of the SGA, it has two parts. Part 1 states that where there is a contract for the sale of specific or unascertained goods; the title to property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. This is highlighted by the dictum of Diplock LJ in the case of RV Ward Ltd v Bignall10, where it was held “very little is needed to give rise to the inference that property in specific goods is to pass only on delivery or payment11”. If not intention is expressed, then section 18 is applicable, which provides that where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or delivery or both, be postponed. The case of Tarling v Baxter12 highlights this where it was asserted that “a haystack was bought, the seller was looking after it for the buyer with the price to be paid after the contract date and before delivery. Before paying for the haystack it burnt down, the court utilised rule 1 to ascertain who owned the haystack, the buyer still had to pay”13. In the case of Dennant v Skinner14 it was asserted that “if intention changes it is irrelevant and property will still pass subsequent to their intention at the time of making the contract15”. Alternatively, section 19(1) of the SGA expressly provides that: “where there is a contract for the sale of specific goods, or where the goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the good until certain conditions are fulfilled; and in such a case notwithstanding the delivery of the goods to the buyer… the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled”. Moreover, section 18(4) relates to buyer approval and if goods delivered to a buyer require the buyer approval then when approval or sale is when property passes. Once the goods have become ascertained in this case at point of delivery, then under section 18 of the SGA, the property will not pass (subject to contrary intention in the contract) until goods are unconditionally appropriated to the contract by one party with the assent of the other. Furthermore, as highlighted in the case of Ward v Bignall discussed above16, there is a presumption that ownership passes to the buyer on delivery. Alternatively, the case of Karlshamms Olefabfiker v Eastport Navigation Corp., The Elafi17, indicates that as soon as the goods are despatched, the goods become ascertained and therefore property passes to the buyer. It is evident in the above case that the rationale was based on the contractual intentions of the parties and many academic commentators argue that this is an exceptional case18. Additionally, in the case of Sainsbury v Street19 it was asserted that “in order to pinpoint the exact time that property passes the contract has to be classified. The contract can be one of two types, being either (i) for the sale of specific goods, or (ii) for the sale of unascertained goods”20. This decision is pre-SGA and is mirrored in the provisions of SGA regarding the distinction between unascertained and ascertained goods. Specific goods are those which are identified and agreed at the time of the contract being entered into for example, the sale of a car as highlighted in the case of Kursell v Timber Operators and Contractors Limited21. The current scenario points towards a contract for ascertained goods and therefore it is likely that ownership of the property will pass on delivery based on the SGA provisions and established case law. On this basis, Hairods are theoretically obliged to pay for the goods delivered in the February consignment. Alternatively, we are not aware of the contract terms and in addressing protection from non-payment, the greatest risk to Jake is if the goods have passed to Hairods on delivery. If Hairods refuse to make payment, Jake could potentially have further rights if the contract between him and Hairods included a retention of title clause to ensure that Jake could recover its goods in the event of non-payment22. This right to reservation of title has through practice been termed the “Romalpa” clause23, due to the case of Aluminium Industries v Romalpa Aluminium24, which set out guidelines regarding enforceability of reservation of title clauses. Although simple as a concept, retention of title clauses have become increasingly widely drafted which has resulted in the courts in a number of jurisdictions striking out the clauses as being too wide to be enforceable25; or alternatively reformulating them as a grant of a security interest26. From the outset this area of law is muddled and obfuscated, being described as a “maze if not a minefield27” as each clause seems to be interpreted subjectively leading to criticisms of ad hoc legal uncertainty. The judicial reasoning in the Romalpa case set out guidelines for understanding retention of title clauses. In the Romalpa case, a Dutch company supplied foil to a UK company on terms that the foil remained S’s property until B had paid all debts due to S. Until then B was required to store the foil separately from its own property. Furthermore, although B was allowed to manufacture products using the unpaid foil the products were to be transferred to S as “surety”. Additionally, if any of the products were resold to a third party S would have the right to receive payment. A liberal approach was adopted in interpretation of the reservation of title clause in the Romalpa decision and in particular, the court enabled the seller enforcement of the following provisions in a reservation of title clause: 1) The right to the original, unused, goods themselves; 2) The right to manufactured goods from the original items; and 3) The right to the proceeds of any resold manufactured or original goods to third parties28. We are not aware of the exact terms of this agreement, however if a valid retention of title clause has been incorporated, then Jake would be able to enter the premises and get back the figurines. Alternatively, Hairods may try to argue that the contract is frustrated or alternatively void on grounds of illegality due to the UK’s signing of the International Convention banning the import of the rare type of mahogany in March 2009 that Jake uses in making the figurines. As such, Hairods may have grounds for arguing that the contract is void on grounds of illegality. In the case of Archbolds (Freightage) Limited v S. Spanglett Limited29it was held that if a contract is illegal on grounds of performance under statutory law or law and the person seeking to enforce an obligation is seeking to rely on an illegal act to enforce their rights, the contract will be void ab initio30. Accordingly, in light of the Convention and the fact that Jake makes the figurines out of the illegal substance, Hairods may have strong grounds for claiming that the contract is void ab initio, which would negate a damages claim by Jake for breach of contract. 2. Jake’s Reward Offer of £3,000. Jake’s reward offer raises potential contractual issues particularly the extent to which he is bound to pay the reward if someone responds to the advert and finds his paintings. The law of contract stipulates three fundamental requirements to establish a legally enforceable contract; namely offer, acceptance and consideration (it is important to note that parties entering into a contract must also have legal capacity to do so and it is presumed from the facts given that capacity is not an issue in this case). Lord Wilberforce asserted the rule for formation of contract in New Zealand Shipping Co Limited v A M Satterthwaite, The Eurymedon31: “English law having committed itself to a rather technical….. doctrine of contract, in application takes a practical approach…… into the marked slots of offer, acceptance and consideration”32. An “offer” in the context of contract law has been described as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the “offeree.33” The “expression34” may take different forms. The intention element is an objective consideration and the case of Smith v Hughes 35emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. Furthermore, the law distinguishes between an offer and an invitation to treat, which is not an offer but an indication of willingness to negotiate a contract36. For example, in the case of Gibson v Manchester City Council37, the words “may be prepared to sell” constituted an invitation to treat and not a distinct offer. Indeed, the Gibson decision challenged the traditional view for formation of contractual agreement. In this case, Lord Denning asserted that when considering whether there is a binding contractual agreement, it could be argued that “there is no need to look for strict offer and acceptance. You should look at the correspondence as a whole and at the conduct of the parties and see therefore whether the parties have come to an agreement on everything that was material38”. However, there has been some uncertainty in this area of law as evidenced by the case of Carlil v Carbolic Smoke Ball Limited39. In this case, the defendant was the proprietor of a medical substance and placed and advert in the Pall Mall Gazette promising to pay $100 to anyone who used the carbolic smoke ball for two weeks and who for a limited time after contracted the flu virus. Carbolic Smoke Ball Limited argued that the advert did not constitute an offer but was rather an invitation to treat. The Court of Appeal rejected this argument and held that there was a legally enforceable contract. The advertisement constituted an offer to the whole world and was capable of amounting to an offer of a unilateral contract without the requirement for acceptance. The Carlil decision had far reaching implications for contract law, with some commentators arguing that there is no difference between an “invitation to treat” and a contractual “offer”40. Furthermore, valid acceptance is final and unqualified acceptance of an offer as demonstrated in the case of Peter Lind Limited v Mersey Docks & Harbour Boar41, highlighting the “mirror image” rule, where acceptance must be unequivocal and unconditional, therefore acceptance must “mirror” the offer. Moreover, acceptance is a “final and unqualified expression of assent to the terms of an offer”42. If we apply this by analogy to the current scenario, Jake’s offer of a reward would appear to constitute an offer and if someone returns the paintings in accordance with the acceptance principle, Jake will be bound to pay the reward. 3) Potential restraint of trade issues with Bella Bella is currently employed by Jake as an apprentice and she will be leaving his employment in 3 months. Jake may wish to restrict Bella’s ability to pass on the trade secrets and work for competitors post contract this raises the issue as to the legality of any restraint of trade clause that may be in the contract between Bella and Jake. Firstly, the general principle is that covenants in restraint of trade will prima facie be void unless it complies with the following two conditions: 1) The clause is reasonable as between the parties; and 2) The clause is reasonable having regard to the public interest. Furthermore, in employment contracts, it is presumed that employees are in an unequal bargaining position43 and as such, restrictive covenants will be scrutinised more severely than in other contexts. For example, in the case of Herbert Morris v Saxelby44, the House of Lords held that a restraint of trade clause would be void unless it was protecting some genuine proprietary interest on the part of the employer “whether in the nature of trade connection or in the nature of trade secrets45”. Furthermore, it would be void if merely aimed at avoiding competition or prevented an employee using personal skill and knowledge acquired during employment. Accordingly, a restrictive covenant cannot be too wide in subject matter and must not be too wide in terms of the geographical and temporal limits placed on the employee’s activities46. This will ultimately be a question of fact and in the Nordenfelt case a restraint lasting 25 years was upheld on a weapon inventor. This was justified on the basis of the claimant’s key position, the large payment he received as consideration for agreeing to the restraint, coupled with the fact that the industry he was involved in was global yet the restraint was limited to the UK. Conversely in the case of Mason v Provident clothing47, a restriction on trading within 25 miles of London for three years was held to be void when the sales representative had been working in Islington, which highlights the fact that the very special nature of employment relationships requires a different legal approach outside the parameters of commercial legal principles to strike an appropriate balance. However, even if a clause is too wide, the courts may sever the unreasonable part and enforce the rest48. Severance can only be carried out in respect of a separate, unenforceable promise and if the covenant is construed as one indivisible promise, it will either stand or fall as a whole49. For example in the case of Atwood v Lamont50, Court of Appeal refused to sever on the grounds that the clause was a single, indivisible agreement and the doctrine of severance was only enforceable in respect of separate promises. The issue as to whether clause regarding poaching of employees is valid has created problems51. In the case of Kores v Kolok52, the Court of Appeal refused to uphold a contract between two competing employers that neither would employ former employees of the other. In case of Hanover Insurance Brokers v Schapiro53 the Court of Appeal refused to enforce such a covenant on the grounds discussed in Kores. However, this hasn’t always been followed and ultimately will depend on the facts54. Therefore, if we apply this to the current scenario, ultimately the validity of any attempt to impose a restraint of trade clause on Bella will be a question of fact and depend on the length of the clause and the area of restriction imposed in any such clause. Read More