Contract Law: The Essentials - Assignment Example

How do the courts deal with the battle of forms, where parties to an intended contract exchange forms containing mutually inconsistent terms? In the contemporary business climate, the basic legal doctrine of offer and acceptance is not always sufficient to determine the terms upon which the parties have contracted. For example, contract formation in construction contracts often involves lots of pre-contractual correspondence with several exchanges between the commercial parties involving offers and counter offers (McKendrick, 2009). The case of Hyde v Wrench ((1840) 49 E.R. 132) established that a counter offer brings an end to the original offer. Additionally, as contractual parties will often negotiate through exchanging correspondence, with a series of counter offers as to price and the contract terms; this has been referred to as the “Battle of the Forms” (Beale, 2007). In considering this Beale in Chitty on Contracts underlines this problem and concludes: “Thus it is possible by careful draftsmanship to avoid losing the battle of the forms, but not…….. to win it. The most that the draftsman can be certain of achieving is the stalemate situation where there is no contract at all” (Beale, 2007). In order to address this legally, the courts have adopted the “last shot principle”, which was established in the case of Butler Machine Tool Co –v- Ex Cell-O-Corp ((1981) 24 BLR 94). According to this principle, the presumption is that the last offer which has been accepted without qualification will be determined as covering the conditions of the contract. This was confirmed in the recent case of Tekdata Communications Ltd v Amphenol Ltd ([2009] EWCA CIV 1209), which confirmed that there the general principle of the “last shot” wins was applicable unless there was unequivocal evidence of contrary intention. For example, in the Tekdata case itself the parties were in a production chain involving four companies producing aircraft components and at first instance, the trial judge departed from the last shot doctrine on the basis that the parties were part of a complex supply chain where prices were non-negotiable and the defendant did not suggest that its own terms and conditions were incorporated into the contract. However, the Court of Appeal rejected this rationale and held that “the context of a long term relationship and the conduct of the parties” may in certain circumstances be sufficiently strong to displace the usual “last shot wins” rule. Therefore, whilst the general principle is that the last shot wins, the course of dealing between parties may sometimes negate this and result in the terms and conditions applicable being different to those in the final counter offer (McKendrick, 2010). This is highlighted by the example in British Road Services Limited v Arthur Crutchtley & Co Limited ([1968] 1 ALL ER 811), where the Court of Appeal held that the long course of dealings between the parties was central to determining the “last shot” of the battle with regard to whose terms and conditions were applicable. On the one hand, this approach to the battle of the forms goes further to reflect the commercial intentions of the parties and reality of their agreement as opposed to applying an inflexible interpretation of the last shot principle. However, there are problems in this approach due to interpretation and application in commercial contracts particularly in construction contracts. For example, letters of intent are commonly utilised in the construction industry to cover pre-existing negotiations, however difficulties arise when formal contracts are not entered into and work has been carried out by one party in reliance on the letter of intent (Adriaanse, 2010). This often becomes contentious particularly as such letters are often addressing the rights and obligations of parties with a view to entering into a long term contractual relationship. As such, it is common in the construction industry for negotiating parties to rely on the letter of intent to address long term delivery requirements and materials purchase orders (Adriaanse, 2010). However, ambiguity as to the contractual status of such letters of intent lends itself to dispute as to the extent of liabilities and obligations under the letter of intent. The ambiguity of their legal status is perpetuated by the fact that it is common for construction work to commence before completion of contract. As a result, whilst letters of intent are intended to provide a degree of legal protection, the uncertainty regarding the extent to which letters of intent can be enforced has created problems for the judiciary in interpretation of the battle of the forms in the event of dispute (Fafinski & Finch, 2009). For example, Fullbright and Jaworski International highlight the point that in design and build contracts, contractors often want to commence the design and procurement obligations immediately after the contract has been awarded, but before the execution of a full written contract (Fullbright & Jarowski, 2008). Moreover, even if work has been agreed at the outset disputes can arise from interpretation of what constitutes performance obligations from the contractual negotiation phase (Adriaanse, 2010). The central legal position covering this issue is the dictum in the case of British Steel Corporation v Cleveland Bridge & Engineering Co Limited((1981) 24 BLR 94). In the British Steel case, the judge noted that in the majority of cases where work was undertaken pursuant to a letter of intent, it would not matter whether the contract did or did not come into existence. If the parties had acted on the letter of intent, the payments claim would be based on a quantum meruit basis under the law of restitution regardless of whether the claim was in contract. However, the inherent difficulty with a letter of intent is where a party is seeking to claim damages for breach of contract and it is argued that no contract is entered into. Accordingly, the issue of whether a contract is in existence is vital. Moreover, if there is no contract, it begs the question as to what sums the prejudiced party is entitled to under the restitution based quantum meruit principles. On the particular facts of the British Steel case, it was held that the letter of intent covered pre-contractual negotiations and as no terms had actually been agreed and therefore there was no binding contract on the parties. Therefore, the extent to which a contractor can rely on the letter of intent to enforce their rights will inherently be dependent on what terms are agreed to in the letter of intent itself. In the British Steel case for example, whilst the major contract had not been agreed, the court determined that the work had to be paid for. The British Steel case has been criticised as leading to an unsatisfactory result (McKendrick, 2009); and Lord Denning suggested that in dealing with the battle of the forms: “the terms and conditions of both parties are to be construed together…If the differences are irreconcilable….then the conflicting terms may have to be scrapped and replaced by reasonable implication” (In McKendrick, 2009). For example, in Walford v Miles (1992] 2 AC 128) and Pagnan SpA v Feed Products Ltd ([1987] 2 Lloyd’s Rep 601) it was suggested that if the terms in dispute are not fundamental to the overall purpose of the contract, then they could be ignored or severed when considering the battle of the forms, provided the main terms of agreement were not in dispute. The underlying rationale for the approach in British Steel was justified on grounds of the freedom of contract principles and the fundamental principle of the requirement of agreement of contractual terms and intention to enter into contractual relations. For example, in Courtney and Fairbarn Limited v Tolani Bros Hotels ([1975] WLR 295), it was held that in the absence of agreement upon such a fundamental matter as price, it was impossible to say that a contract had been formed. The parties had only reached the stage of negotiation and that could not form the basis of a contract. Another example is the decision in Sir Robert McAlpine Management Contractors Limited v London Demolition (UK) Limited (1990) it was held that the appointment of sub-contractors under a letter of intent could prevent a contract from coming into effect. If the letter of intent did not comply with the express contractual requirements this could then prevent the existence and enforcement of any contract. Moreover, in the leading case of Allridge (Builders) Limited v Grandactual ((1995) CILL 1225) it was held that failure to implement procedures on a particular standard form of contract would indicate that the acceptance of a letter of intent did not constitute a contract incorporating that form. Nevertheless, outside the parameters of quantum meruit and restitution, there has been a gradual development of decisions supporting contractual or extra contractual obligations under letters of intent, which marks a further departure from the last shot principle approach to dealing with the battle of the forms (Adriaanse, 2010). A prime example is Mitsui Babcock v John Brown (1996] 51 Con LR 129), which involved a contract for the construction of a power station. It was held that this decision was based on the factual scenario and that “my review of the authorities leads me to the conclusion that there is no reason in principle why two parties should not enter into a binding agreement, even though they have agreed that some proposed terms should be the subject of further discussion and later agreement”. Accordingly, the extent to which a contractor can rely on a letter of intent to enforce contractual obligations will ultimately depend on the terms specified in the letter of intent, which necessarily requires a case by case approach. Indeed, in the case of Monk Construction Limited v Norwich Union Life Assurance Society ( [1992] 62 BLR) in reviewing the authorities and in particular the decision in the British Steel case, Neil LJ specifically referred to contract law obligations under letters of intent thus: “There may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other….. there may what is sometimes called an “if” contract, i.e. a contract under which A requests B to carry out certain performance and promises B that if he does so, he will receive a certain performance in return, usually remuneration”. Nevertheless, the general presumption will be against a formal contract and in Monk, it was further determined that if no subsequent contract is entered into, then the performance is not referable to any contract and as such, the law requires the party who made the request to pay a reasonable sum for work. Ultimately it will depend on the factual scenario, for example in Trollope and Colls Limited v Atomic Power Constructions Limited ([1963] 1 WLR 333), it was held that as the parties had from the outset, contemplated entering into a formal agreement then the agreement could govern the period of performance prior to execution under the letter of intent. Whilst this decision affirms the principle that contracts can be retrospective in English law, it is arguable that the enforceability of the letter of intent in this case was upheld on grounds of the parties entering into a formal contractual agreement. The central problem regarding the judicial approach to battle of the forms and letters of intent is that uncertainty regarding the efficacy of this device to address the needs and rights of both parties as highlighted by the decision in Emcor Drake and Scull v Sir Robert McAlpine ([2004] EWCA Civ 1733). Furthermore, the contractual status of letters of intent is clearly an uncertain area of law and often depends on the facts of the case and the courts have been reluctant to provide definitive guidance due to the inherent variances of commercial negotiations. For example, in AC Controls v British Broadcasting Corporation ([2002] 89 Con LR 52) it was determined that “in construing and giving effect to the language of the letter of intent, it is necessary to take into account the factual background out of which the letter of intent arose”. Therefore, with regard to the judicial approach to the battle of the forms, it is evident that a strict approach to the last shot principle is not always appropriate in light of the commercial intentions of contracting parties and commercial realities of the contract. In turn, this has led the courts to specifically consider the factual circumstances when dealing with the battle of the forms and in particular, consider the course of dealings. Whilst such an approach is arguably necessary to ensure flexibility of the law to accommodate continuing changes in contemporary commercial contracts, the ad hoc decision making has created problems in practice as evidenced by the British Steel decision. BIBLIOGRAPHY Adriaanse, J. (2010). Construction Contract Law: The Essentials. Palgrave Macmillan Beale, H., Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. Fafinski, S. & Finch, E. (2009). Contract Law. 2nd Edition Longman. Fullbright & Jaworski LLP, “EWCA Ruling in RTS Flexible Systems a Reminder of Risks in Commencing Work Under a Letter of Intent” (2009) Available at www.inhouselawyer.co.uk accessed 2010. McKendrick, E. (2009) Contract Law. 8th Edition. Palgrave Macmillan McKendrick, E. (2010). Contract Law: Text, Cases and Materials. 4th Edition Oxford University Press Read More