Legal Aspects of Contract Administration Case Study

Performance/breach and remedies

Introduction

To determine whether Teto is liable to Retro Ltd and whether Teto is entitled to any remedies for the small orders in the first months requires an examination of the terms of the parties’ contract, their significance and the parties conduct in relation to the performance of the contract.

As Edwina has made a pre-contractual assurance to Teto in the course of negotiations which has not been embodies in the main contract, the parole evidence rule and the possibility of a collateral contract existing where the agreement expressly states that it embodies the parties’ entire agreement is raised. The basic principles of breach of contract will also be discussed alongside the proposed available remedies

The conditions and warranties in the contract will be discussed with a view of establishing actual breach of such conditions and warranties and the possible remedies that accrue to such breach.

Lastly the doctrine of promissory estoppels will also be discussed as an avenue of providing some remedy to Teto.

Body

Teto and Retro Ltd have entered into an agreement on the following conditions:

1. Teto will supply material, the order will be supplied within 3 days and the price will be subject to a 20 % markup on the suppliers cost;
2. The agreement is for a period of a year.

It is important to note that the parties have entered into a written agreement which clause 7 makes clear is an entirely written one and so the parole evidence rule will apply and evidence of prior representations such as Edwina’s assurance cannot form part of the parties contractual relationship.

Collateral Contract

A collateral contract is a term which describes an oral unilateral contract, which is independent from the main written contract. The collateral contract is comprised of an oral promise or assurance made by one party that is the consideration for the other party entering into the main contract: De Lassalle v Guildford. It can only exist where an assurance is given in a pre-contractual context and never post contractually: Hercules Motors Pty Ltd v Schubert.

It is clear that Edwina’s assurance is consideration for Teto to enter the written agreement.

There are three basic requirements of a collateral contract are:

1. That the statement is promissory in nature; and
2. That there is not inconsistency between the main contract and the alleged collateral contract.
3. For a person to establish a collateral contract they must establish that they entered into the main contract in consideration of the statement made by the representee: J J Savage & Sons v Blakney.

Inconsistency

A collateral contract cannot be inconsistent with the main contract which is known as the rule in Hoyt’s Pty Ltd v Spencer.

The possibility of arguing that Edwina’s oral promise constitutes a separate collateral contract faces the difficulty that any collateral promise must be consistent with the written agreement and clause 7 would be interpreted to mean that Retro Ltd’s prior representations cannot be relied upon and so they could not form a separate collateral contract.

Conditions and warranties

Conditions in a contract are those terms that form the basis of the contract. They go to the root of the contract and breach of such terms is considered as repudiation of the contract. A warranty on the other hand is less imperative since it does not affect the foundation of the contract. It can be cured by agreement between the parties but it does not amount to repudiation of the contract. It is however a question of fact as to whether a term is a condition or warranty since parties could choose to consider breach of a condition as a breach of a warranty and choose to proceed with the contract (Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd). This election however allows the elector to claim damages for the trouble they may have incurred due to the breach as per the Sale of Goods Act 1985.

Promissory Estoppel

The doctrine of Estoppel is an equitable claim based on notions of unconscionability and is not a common law contractual claim to vary or add to the written agreement. The parole evidence rule, logically therefore, should have no operation or impact where the conditions for establishing a claim in Estoppel are satisfied. Common law and equitable principles are often applied in a supplementary manner.

The very essence of promissory Estoppel is that it precludes a promisor from going back on their promise even though the promise is not supported by consideration moving from the promisee.

There are certain pertinent elements of promissory estoppels that have been accepted by the courts as laid out in the vase of Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 as follows:

1. There needs to be a promise sufficiently clear and unambiguous representation. The promise or representation can be express or implied.
2. An assumption generated by the representation of a legal relationship;
3. The defendant had induced the plaintiff to adopt that assumption;
4. The plaintiff acts or abstains from acting in reliance on that assumption or expectation;
5. The defendant knew or intended him to do so;
6. The plaintiff’s action or inaction will occasion determine if the assumption or expectation is not fulfilled;
7. The defendant had failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.

In application, Teto makes it clear that “providing Edwina order at least 100 meters per month that he is prepared to enter the contract and after she has replied “I can assure you …” he enters the contract

This statement is a clear and unambiguous assurance that led Teto to adopt the assumption that Edwina would order the minimum of 100 meters per month from him. This statement induced his entry into the main contract (he clearly acted in reliance on the assumption generated by the assurance) and it was intended by Edwina the Managing Director of R to have this effect. It’s not only a term of the contract but also a condition of the contract a breach of which would lead to repudiation.

Edwina’s under ordering in March and April lead Teto to have to incur the expense of storage of the materials and so he has acted in reliance on Edwina’s assurance and has suffered detriment. Je Maintiedndrai Pty Ltd v Quaglia (1980) the SA Full Court held that it was necessary that the going back on a promise or representation would “result in some detriment and therefore some injustice” to the relying party.

Teto v Retro

Edwina accepts the delivery of 100 metres which is late in May. This in effect would have amounted to a breach of a fundamental term of the contract and therefore a basis of termination of the contract. By accepting the late delivery Edwina chose to treat it as a breach of a warranty.

A contract should ordinarily be discharged through performance whereby all the parties perform fully their obligations under the contract (Vermeesch and Lindgren 1998 p.96). Failure by one party to perform his part of the bargain amount to breach of the contract and this may lead to the innocent party to seek damages where loss has been suffered and the exception is where there is frustration to the contract (Greig and Davis1987 p, 10).

The June order involves Teto discussing whether he is able to perform. He asks for at least a week extension and Edwina refuses and repudiates the contract.

Teto had not abandoned the contract but is trying to perform it and it’s necessary to analyze whether Edwina’s termination is valid. It cannot be valid if he has breached an essential term that is so significant that it is a condition of the contract.

Edwina has order fabric from Teto in March and April and although the quantities were less than the 100 metres she promised. Teto would ordinarily treat this as a breach of a condition but he chose to allow the contract to continue. He cannot therefore go back against his election to treat the contract to have been terminated. He however has a right to claim damages for the inconvenience of having to store the extra quantities. He could seek contractual damages under the Sale of Goods Act as well as equitable damages.

Equity acts to do what is necessary to prevent the suffering or detriment and not to necessarily make good the assumption. The promissee is only entitled to the relief necessary to prevent the unconscionable conduct.

Teto would have an action in Estoppel on the following basis

Clause 7 clarifies the position with regard to the ‘oral agreement ‘ between Teto and Retro Ltd. The aforementioned clause 7 makes it absolutely clear that the document embodies the entirety of the parties’ agreement and further states that no prior representations, promises or statements made in the course of negotiations had been relied on by either party or forms part of the agreement. Since we have disqualified the exclusion of the earlier negotiations as part of a collateral contract, they will be considered as part of the contract. The justification is offered by the courts decision in Je Maintiedndrai Pty Ltd v Quaglia where the court held inter allia that a party cannot be allowed to fall back on their promise if such withdrawal “results in some detriment and therefore some injustice” to the opposite party by (Adams and Brownsword 1987, p 205). This opinion is further supported the case of Whittet v State Bank of New South Wales (1991)24 NSWLR 146 where the court evaluated the importance of the parole evidence rule and concluded that this rule does not water down the importance of evidence of pre contractual negotiations. As the courts held in a similar discussion in Hoyt’s Pty Ltd v Spencer it is possible to go against the parole evidence rule to permit the true intention of parties in a contract.

Subsequently there was a representation by Edwina the representative of Retro ltd at the creation of the contract that she would order fixed minimum quantity. This is a sufficiently clear and unambiguous representation (Greig and Davis 1987 p 814). It was on this sole promise that he agreed to enter into contract since it would otherwise be uneconomical. Edwina allowed consciously and voluntarily permitted Teto to rely on the truth of the promise of a fixed volume order even though she knew that it would not be practicable given the nature of the fluctuating demand of her line of business. The plaintiff in this case made reasonable efforts to maintain and fulfill the promise but he was frustrated by the promisor.

In Poussard v Spiers there was a contract where Poussard was to make an opera performance for a period of three months but became ill just days before she was to start making her unable to perform for four nights and was subsequently replaced by another singer by Spiers. The holding of the court was that Spiers was entitled to terminate the contract (Posner 1992 p90-130).

Retro ltd is liable to Teto for breach of contract (Freeth v Burr). A breach is said to occur where a given party to a contract fails to precisely and exactly perform his obligations under the contract (Pengilley 1987 p, 247). In this regard, we have a case of actual breach since Retro ltd refused to perform his end of the bargain by refusing to take delivery as stipulated in the contract. It is also a condition of the contract that Retro ltd should be in a position to order a minimum amount of goods at a time. This was a fundamental term of the contract and is therefore a condition which upon breach entitles Teto to claim damages for the termination of the contract. Further clause 3 specifies as a condition that the buyer is prohibited from ordering from another supplier. By declining to take an order from Teto and ordering from another supplier, the company will have breached a fundamental term of the contract and would have therefore repudiated the contract. Teto can therefore consider the contract terminated and he can sue Retro ltd for breach of contract.

Quantification of damages

Liquidated damages are to be calculated based on the rules of the sale of goods act. They will seek to compensate Teto for the expenses and costs that he incurred in committing himself to the contract. Un-liquidated damages will be measured according to the principles of equity.

References

Adams, J. N. and Brownsword, R. (1987) The ideologies of contract. Legal Studies, 7: 205–223

Coase, R. H. (1960) The Problem of Social Cost: Journal of Law and Economics, 3(1), 1—44.

Greig, D and Davis, J. (1987) The Law of Contract: Law Book Co Sydney 1987 at 605. 18. Queens University of Technology.

Kronman, A and Posner, R. (1979) The Economics of Contract Law. London: Little brown. Print

Lockhart, C. (1996) Misleading or Deceptive Conduct: Issues and Trends. Annandale. Federation Press, p 263. Print

Parish, R. (1980) Consumer Protection and the Ideology of Consumer Protectionists in A J Duggan and L W Darvall (eds), Consumer Protection Law and Theory Sydney : Law Book Co., 1980. p 229, Print

Pengilley, W. (1987) Section 52 of the Trade Practices Act: A Plaintiff’s New Exocet? Australian Business Law Review, P 247

Posner, R. (1992) Economic Analysis of Law. London: Harvard University Press. Print

Terry, A., & Giugni, D. (1994) Business, Society and the Lam, Sydney: Harcourt, Brace. Print

Vermeesch, R., & Lindgren, K. (1998) Business Law of Australia, London: Butterworths. Print

Case list

1. Cooper V Phibbs (1867) LR 2 HL 149
2. Cutter V Powell (1795) 101 ER 573
3. Ingram V Little [1961] 1 QB 31 CA
4. Lewis V Avery [1971] 3 All ER 907
5. Mcrae V Commonwealth Disposals Commission (1950) 84 CLR 377
6. Poussard V Spiers(1876) 1 QBD 410
7. Spice Girls Ltd V Aprilia World Service BV [2002] EWCA Civ 15
8. Taylor v Webb. (1937)
9. Freeth v Burr (1874 LR 9 CP 208 at 213 per lord Coleridge)
10. Alfred C Toepfer international GmbH v itex Itagrani Export SA 1993)
11. Hochster v De la Tour (1853) 2 E & B 678
12. Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA)