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A contract intends to make formal agreements between two or more parties. The parties could be individuals or legal entities. As such, the most basic element of a contract is its nature to be mutual. A legally binding contract therefore should not be borne out of coercion. Contracts also ought to have an offer and acceptance element. Another major element of a contract is the mutual exchange of something of value in terms of either critical information or payment. In this sense, the client is obligated to offer critical information with regard to the contract. This paper will critically analyze a case study of a contract between Huang, a Malaysian businessperson, and Bill, an Australian builder. The main purpose of seeking compensation of damages resulting from a breach is to put the innocent party in its initial position if the breach had not occurred in the first place. The motivation for the study is to offer Huang advice on his legal and contractual rights.
An overview of contracts of business issues
Traditionally, it was a normal practice that consequential losses, as in the present of Huang, were equated to the second facet of Hadley v Baxendale. This was the case in the English cases of Millar’s Machinery Co Ltd v David Way and Sons (1935)1. The case of British Sugar Plc v NEI Power Projects Ltd (1997)2 and Hotel Services Ltd v Hilton International Hotels (UK) Ltd 3. In Australia, there has been a departure from this legal norm. Courts in Victoria and New South Wales have been of the view that it is wrong to equate consequential damages to the second facet of Hadley v Baxendale. In the recent case of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd :4
- The court held that consequential loss ought to imply ‘anything beyond the normal measure, such as profits lost or expenses incurred through breach’.
- The words expressing the contract ought to take ‘ordinary and natural meaning’ though regard may be given to contextualisation
Facts of the Contract
Huang submits a tender to a manufacturing firm and his tender is accepted. He is also given a 1st November deadline to have completed the garage and the workshop. Huang contracts, Bill, a builder in Melbourne, to construct the workshop and the garage. He explains to Bill that he needs the garage and the workshop complete by 1st of November. However, he does not disclose exactly why he needs it ready by the said date. Due to delays on Bill’s part, the garage and the workshop are not completed by the 1st of November. Thus, Huang loses the supply contract and suffers a loss of 150,000 Australian Dollars. Huang contemplates suing Bill for breach of contract and claiming the lost sum of money from Bill.
Issues of Concern
Legal provisions that govern contracts with builders afford Huang a range of rights and privileges. The law provides that once Bill had entered into the contract with Huang, he was obliged to carry out the said works with reasonable care and skill and to complete the work in a reasonable time. The timeline of completing the project would be subject to any time limits provided for in the contract. In the present case, Mr. Huang had clearly explained to Bill that he needed the workshop and the garage ready by the 1st of November. From the outset, therefore, Bill was aware of the deadline. However, the issue of concern is whether the indicated timeline alone without the provision of information on the damages could accrue in case of a delay is binding. Bill had failed to disclose the real information on why he needed the garage and the workshop completed by the 1st of November.
In a similar case, Astley V Austrust Limited, Austrust Limited5 had sued Astley, a partner that had acted for it, for negligence in the provision of legal advice. The trial judge in this case determined that both partners had been negligent and the negligence by the parties had in effect contributed to the losses accrued. In another instance, Crouch developments Pty Ltd v D & M Pty Ltd(2008 ) and the plaintiff Crouch Developments Pty Limited entered into a contract with the Defendant D & M Pty Ltd to construct 27 housing units. However, the time limits of contracts were delayed. Both parties traded accusations as to who occasioned the delay. The Chief Justice Martin, in making the decision, rejected the relief sought by the plaintiff and observed that the plaintiff had to make a strong case in terms of the reliefs she sought from the court. Therefore, the failure to clearly disclose the real reason for completing the workshop and the garage by Huang by the deadline given opened a window for assumptions by the builder.
In the case of Tyco Fire & Integrated Solutions Limited v Rolls Royce Motors Cars Limited, English Court ruled in favor of Rolls Royce. It observed that, under the construction contract, the contractor is bound to indemnify the employer when damages arise due to lack of diligence on the part of the contractor. In Campbell v C.J Cordony & Sons PTY Limited6, the supreme court of New South Wales confirmed that the damages for breach by a builder include costs and consequential losses. Justice Hammerschalg, in his determination, held that Campbell was entitled to claim damages for breach of contract for defective works done as well as the consequential damages. His Honours also observed that even if he were to infer that the Campbell continues with another builder at a reasonable price as the defendant had sought, the following would not be clear: the costs of construction, the new terms of engagement, and the capability of the new builder fully conforming to the contract requirements. In the above instance, it is clear that when the terms are clearly stipulated by the contract and enough evidence of breach adduced in court, it is possible to claim compensation.
The law of contracts provides that one deserves compensation when the work or works carried out with reasonable care and skill or do not meet the stipulated time lines. Also, compensation is allowed when the there is prove that through the builder’s negligence the employer incurs consequential losses and when anticipated remedies of breach are not forth coming or do not meet the required standards.
Another issue of concern is that the agreement between Huang and Bill did not in way stipulate any consequences, whether legal or otherwise, if the contract was not executed in the manner that was desired. This should not in any way worry Mr Huang since absence of any clauses providing for compensation of damages resulting from breach of the contract does in any way impede him from seeking damages in a legal suit if enough proof can be adduced in court to the effect that he suffered the loss as a result of breach in part of Bill. The Construction Contracts Act 2005 sets out the criteria for successful claims in instances of breach of contracts. According to the Act the contractual agreements need not to be particular in the sought of compensation that they would require in case the contracts are breached7. As such, Mr Huang agitation for compensation in damages cannot be disallowed because of the absence of a damages clause in the contract.
It is also imperative to observe that, in most legal cases on breach of contract the defense is deemed affirmative. In essence, this means that the defendant bears the burden of proving innocence at trial. Affirmative defenses do not in any way object to the primary claims by the plaintiff but rather, are geared at presenting attendance or intervening factors that can render the plaintiff’s claims moot.
Affirmative defenses raise a number of issues that could affect Mr. Huang. Firstly, it becomes pertinent as to whether the contract Huang had entered with Bill was a written agreement or otherwise. As such, if the agreement were oral it can become difficult for the firm to prove the existence of a contract. By invoking a statute of fraud the defendant may argue that state laws were breached and as such render Mr. Huang’s claims moot.
It is also critical that Mr. Huang first ascertains the facts of the contract in detail. In case the details of a contract were not clearly agreed upon, the defense could raise the concern that the contract was indefinite. Of concern here, is whether the contract entered by Huang was conclusive or partial. In the light of the above, a contract may be found indefinite when it is not conclusive in its intentions. Huang’s failure to inform Bill on why the garage and workshop ought to have been complete by 1st of November could open an opportunity for the defense to raise issues of an indefinite contract though the court also evaluates the question of whether the parties had acted in good faith when they entered into a contract.
By not disclosing why the garage and the workshop ought to have been completed by the 1st of November or the damages that he could incur, Huang exposed himself to accusations of fraudulently induced contract. This happens when a contract is obtained through lies or duress. As such, Mr. Huang may have to defend his act of withholding the information from Bill raising the stakes of the case that he seeks to present.
Also available to Mr. Huang is the option to seek arbitration between him and Bill to establish how they can mutually agree on the issues of contention. This is very necessary to Huang because instituting legal proceedings and sustaining legal suits till a court decision is arrived at can be an expensive undertaking. Court cases, many times to take longer determine further hurting Huang situation. In this case, Mr. Huang may find it necessary to establish whether Bill is a member of any trade association with conciliation, Mediation or arbitration service that can hear his complaint. In this instance where Huang seeks compensation, it will be appropriate to pursue arbitration since the decision would be binding legally and will avoid legal suits except in case of enforcing an award. It is critical that Mr. Huang approaches this avenue some level of Open-mindedness and consider any alternative offers that the builder may be willing to extend to him since going to court may not necessarily guarantee him improved offers.
As was earlier observed in the introduction, compensation for breach is intended to return an aggrieved party to the initial position. However, a successful claim for compensation in Australia going by the recent court precedents, one has to prove that the damages suffered out of the breach are beyond what the courts have termed ‘normal’ that is beyond profits lost and other expenses that one may have incurred as a result of the breach. For instance, in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd , the court held that ‘consequential loss’ excludes any loss emanating from ‘immediate or eventual, flowing from a contract breach’ in essence therefore I would advise Huang to seek arbitration as opposed to instituting legal Proceedings against the bill. The stakes of the case as has been evidenced by court precedents are high and the burden of proof squarely lies on Huang to prove that he indeed suffered ‘consequential losses’ as defined by the courts in the recent court cases.
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Campbell v C.J Cordony & Sons PTY Limited  NWSC 63.
Hadley v Baxendale  EWHC J70.
Millars Machinery Co Ltd -v- David Way & Son;  1935.
British Sugar Plc v NEI Power Projects Ltd  87 BLR 42.
Hotel Services Ltd -v- Hilton International Hotels (Uk) Ltd, CA, Cited, (Bailii,  EWCA Civ 74,  BLR 235).
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (Peerless)  VSCA 26.
Construction Contracts Act 2005.
- Millars Machinery Co Ltd -v- David Way & Son  CA.
- British Sugar Plc v NEI Power Projects Ltd  87 BLR 42.
- Hotel Services Ltd -v- Hilton International Hotels (Uk) Ltd, CA, Cited, (Bailii,  EWCA Civ 74,  BLR 235).
- Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (Peerless)  VSCA 26.
- Astley v Austrust Limited. High Court of Australia (2000) 197 CLR 1.
- Campbell v C.J Cordony & Sons PTY Limited of  NWSC 63.
- Construction Contracts Act 2005.