CIPS
Level 6
SUGGESTED SOLUTIONS TO
PRACTICE QUESTIONS
Legal Aspects in
Purchasing and Supply
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CHAPTER 24
Suggested Solutions to Practice Questions
Setters
This involves the familiar problem of the ‘battle of the forms’. As is often the case, the nub of the problem is ‘who fired the last shot?’. Instead of being distracted by the confusing (though realistic) early negotiations you should focus on the final stages of the process, on the ground that a counter-offer automatically causes an earlier offer to lapse.
Although the sequence of quotations, orders and acknowledgements is confusing, it is possible to simplify matters by proceeding to the final stage of negotiations to determine when a valid offer and acceptance came into existence.
In this case it is reasonably clear that Gregg’s ‘standard form of acknowledgement’ constitutes a counter-offer which causes the offer in Setters Ltd’s order form to lapse. (The fact that Gregg’s acknowledgement refers to ‘accepting’ the order should not obscure the real issue, which is that Gregg is here making a new offer, not accepting the contract on Setter’s terms.) This offer of Gregg’s appears to be accepted when Setters first of all signs for the components and then proceeds to use them in his manufacturing process.
On the above analysis, clause 26 in Setters Ltd’s standard terms has no legal effect because it has not been incorporated in the contract. Its attempt to invalidate the terms of any counter-offer has no legal effect. The situation was similar in the leading case of Butler Machine Tool Co Ltd v Ex-Cell-O Corporation(England) Ltd (1979). In that case too the standard terms of one party (the seller) insisted on compliance with their own terms; but this term was rejected by the buyer’s counter-offer and the seller was therefore held to have waived it.
Conclusion: the contract has been concluded on Gregg’s terms.
Implied terms
You should illustrate your answer to the first part by reference to decided cases and appropriate statutes.
(a)(i)There are two circumstances in which the courts will imply terms into a contract.
•To take account of the legal nature of the contract (‘terms implied in law’)
•To give business efficacy to the contract (‘terms implied in fact’)
The distinction was made clearly in the case of Lister v Romford Ice and Cold Storage Co Ltd (1957): ‘[an implied term] such as the nature of the contract must call for, or as a legal incident of this kind of contract’ [ie a term implied by law] and ‘an implied term such as might be necessary to give business efficacy to the particular contract’ [ie a term implied in fact].
Terms implied in law
These terms are implied because they form a necessary part of the type of contract concerned. They are implied as a matter of policy, and not just because they are what the contracting parties intended.
A leading case in this category is that of LiverpoolCity Council v Irwin (1977). Certain tenants in a block of council flats withheld their rent payments in protest at the poor condition in which the block was maintained, even though their rental agreements specified no obligation on the landlord in this respect. It was held that the nature of the contract was such that a term of this kind must be implied: the landlord must be obliged to maintain the common parts of the block in reasonable condition.
In this category the term implied must be a reasonable one, as well as being necessary in this type of contract. Reasonableness alone, however, is not sufficient.
Other examples in this category might include an implied term that an employee will render loyal service to his employer, and that he will use reasonable care and skill when performing his duties: Lister v Romford Ice and Cold Storage Ltd (1957). A final example is terms implied into a contract as arising out of custom in the particular area or industry: Hutton v Warren (1836).
Terms implied in fact
Referring back to the earlier quotation from the Lister case, these are terms implied into a contract in order to give it ‘business efficacy’. The leading case is The Moorcock (1886). As was explained by Bowen LJ in that case:
‘An implied warranty… is in every instance founded on the presumed intention of the parties and on reason. It is the implication which the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either of the parties’.
In the case concerned, the defendants (wharf owners) allowed the claimants to load and unload at their wharf. The claimant’s ship was grounded at low water and damaged by settling on a ridge of hard ground. It was held that there was an implied obligation upon the defendants to ensure that the mooring would be reasonably safe.
(ii)Terms are also implied into contracts by statute. This is done in some cases to protect the weaker party (eg in contracts between consumers on the one hand and traders on the other), and in others as a means of filling gaps in the agreements between parties.
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Suggested Solutions to Practice Questions
An example within the first purpose would be the implied rights of a buyer under the Sale of Goods Act 1979. An example within the second purpose would be s 29 SGA 1979, which states that unless otherwise agreed the place of delivery shall be the seller’s place of business.
(b)The extent to which parties can exclude or vary implied terms depends on whether they are implied by the courts or by statute.
In the former case, the implied terms are automatically excluded or varied whenever the parties agree something different. This is because the courts will not in such a case overrule an express term.
A statutory implied term (such as the example of s 29 SGA 1979 above) may also be varied if it is only intended to fill a gap in the parties’ agreement. But it is usually not possible to exclude or vary an implied term designed to give protection to a weaker party, unless it results in improving the weaker party’s position. For example, an employer is obviously allowed to grant a longer period of notice to his employees than the minimum specified in the Employment Protection (Consolidation) Act 1978.
Eric
The issue of exclusion is of great importance in purchasing contexts. When tackling questions in this area it is often useful to structure your answer in three parts:
•whether the term has been incorporated into the contract.
•if it has been incorporated, whether it in fact covers the events described (ie is not too narrowly drawn)
•whether the clause is valid under the Unfair Contract Terms Act 1977 (UCTA 1977).
If the exclusion clause is valid, Eric will not be able to succeed in a claim against Actonna Ltd. To establish whether it is valid, we need to consider:
•whether it has been incorporated into the contract
•whether it covers the events in question
•whether it is valid under UCTA 1977.
Has the term been incorporated?
The question states that the term appears in Actonna’s printed terms of business. However, we are not told where these printed terms are evident – on a signed agreement, on an invoice delivered later or in some other place.
If the term appears on an agreement signed by Eric he will have difficulty denying that he knew of and accepted it: L’Estrange v F Graucob Ltd (1934). His only recourse would be to claim a misrepresentation by Actonna and there is no suggestion of this in the question.
If the term did not appear until delivery of the machine or (even later) on submission of the invoice, then this may be too late for Actonna to rely on it. The point is that it must be incorporated at the time the contract is made, and this is likely to have been somewhat earlier, when Eric’s order for the equipment was accepted.
A point that may be relevant in this context concerns any previous dealings between the parties. If Eric has hired a carpet cleaner from Actonna in the past, or at least if he has done so regularly or frequently, a court might hold that he was or should have been aware of the term: Hollier v Rambler Motors (AMC) Ltd (1972). Actual notice to Eric is apparently not a requirement; such constructive notice would be sufficient.
Does the clause cover the events in question?
The wording of an exclusion clause must, to be effective, be sufficiently inclusive as to cover the events which arose as a result of the alleged breach. In Andrews Brothers (Bournemouth) Ltd v Singer & Co Ltd(1934) the claimants agreed to purchase ‘new Singer cars’ from the defendants. A clause in the agreement excluded ‘all conditions, warranties and liabilities implied by statute, common law or otherwise’. A car sold by the defendants to the claimants was not new, but had covered 550 miles. The claimants claimed a breach of contract, and it was held that the defendants could not rely on the exclusion clause: its wording referred to implied terms only, and not to the express contractual term that the cars would be new.
This case also illustrates a weapon used by the courts to discourage excessive reliance on exclusion clauses, namely the contra proferentem rule: any ambiguity in such a clause is resolved against the person who seeks to rely on it. This was another issue raised in the Rambler Motors case: a clause exempting a garage from damage to cars caused by fire did not specify whether this included fires arising from the garage owner’s own negligence. In view of the ambiguity the clause was construed contra proferentem and held to apply only to non-negligent damage. For another example, see Houghton v Trafalgar Insurance Ltd (1954).
In the present case it appears that Actonna’s clause clearly does cover the damage to carpets, but arguably does not cover the personal injury suffered by Eric. In fact, though, any possible ambiguity about this latter point is resolved by UCTA 1977: see below.
Is the clause valid under UCTA 1977?
The Act restricts the use of exemption and limitation clauses where contracts are made in the course of business.
To begin with, the Act specifies that liability for death or personal injury caused by negligence cannot be excluded; if Eric’s rash is indeed caused by the carpet cleaner he will have a claim against Actonna.
Liability for other loss caused by negligence can only be excluded where it is reasonable, and the burden of proving reasonableness lies with the person seeking to rely on the clause. To be reasonable, the clause must be ‘a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’: s 11(1) UCTA 1977. It is doubtful whether a court would hold Actonna’s clause to be a reasonable defence against what appears to be gross negligence.
Conclusion: Eric should be advised that he has a claim against Actonna in respect of his personal injury, but that his claim in respect of damage to the office carpets is uncertain.
Chris
This question concerns the nature of misrepresentation and the effect of a misrepresentation on the validity of a contract. As often, a sensible approach is to begin by outlining the general principles of law in the relevant area, and to apply them to the specific facts of the question. The facts in this case bear some resemblance to those of Bisset v Wilkinson (1927), but there are important differences.
The facts of the question suggest that a misrepresentation may have occurred. For this to affect the validity of the contract it must be shown that a material fact was misrepresented, and that the misrepresentation induced the innocent party to enter the contract.
The remedies, if these conditions are satisfied, may consist of repudiation and/or damages, depending on whether the misrepresentation is fraudulent, negligent or innocent.
•‘Fraudulent’ means that the representor knew that what he said was untrue, or was reckless as to its truth or falsehood.
•‘Negligent’ means that the representor, without deliberate intent to mislead, takes insufficient care as to whether his statement is false.
•‘Innocent’ means that the representor is not at fault in making the misrepresentation, perhaps because he had good grounds for believing it to be true, or because he had relied on professional advice.
In general, silence does not amount to a misrepresentation, but there are circumstances where it can do.
•In contracts ‘of utmost good faith’ (uberrimae fidei), such as insurance contracts
•Where what is left unsaid distorts the truth of what is actually said: Dimmock v Hallett (1866).
•Where a change in circumstances means that a statement true at the time it was made subsequently becomes untrue: With v O’Flanagan (1936).
To affect the validity of a contract the misstatement must be one of fact, and not just of opinion: Bisset v Wilkinson (1927). However, where an incorrect opinion is so at variance with the facts that no reasonable man could have held it, the misstatement can amount to a misrepresentation. This applies especially in cases where one party has particular knowledge of facts, or particular expertise, which is not held by the other party. See the cases of Smith v Land and House Property Corporation (1994) and Esso Petroleum Co Ltd v Mardon(1976).
How do these general principles apply in the case of Chris and Casper?
•The statement about annual turnover appears to be a statement of fact. The situation appears to differ from that in Bisset v Wilkinson in that Casper has presumably been close to the family business for many years and might be expected to know, not just guess, so basic a fact about it, and one which could be checked so easily.
•The statement appears to be material. Obviously the amount of turnover is a key factor from a purchaser’s point of view, and the difference between £600,000 and £450,000 is certainly material.
•It is a reasonable inference that Casper was induced by the statement to enter into the contract. The elements of a misrepresentation therefore appear to be present.
What type of misrepresentation is it? At the very least it appears negligent. We are told that Chris did not check it, even though it was surely a matter very easy to check. It could even amount to fraudulent misrepresentation if Chris had no basis for believing the figure of £600,000, but merely plucked a figure out of the air. The element of fraud is certainly present in the circumstances described in the rider to the question, because now we can be sure that Chris knew the statement to be false, and knew it at a time before the contract was made.
Do not be confused here by the case of With v O’Flanagan (1936). In that case a statement was correct when made, but circumstances subsequently changed. Here, the statement has been untrue from the outset, and all that has changed is Chris’s knowledge of its falsehood.
If the misrepresentation is negligent, then under the Misrepresentation Act Casper can rescind (provided he acts quickly) or recover damages. Alternatively, he may sue in tort, but then his remedy is limited to damages.
If the misrepresentation is fundamental, Casper can either sue in tort (for damages only) or in contract (for rescission and for damages).
Conclusion:Casper should be advised that he has a strong claim for negligent misstatement, and possibly fraudulent misstatement, against Chris.
Cockburn
This question deals with the important issue of economic duress as a vitiating factor in contract. You should ensure that you are familiar with the leading cases in this area (all referred to in the solution below) and try to grasp the rather subtle way in which this modern doctrine relates to, an dhas partly supplanted, the older approach taken by the courts, which was based on the absence of new consideration for extra amounts payable.
It is best to take these events in the order in which they occurred.
First, Cockburn’s announcement in January that it could not meet its contractual obligations amounted to an anticipatory breach. Cockburn might argue, to the contrary, that the contract was frustrated by reason of the strike, but this argument would probably fail: Davis Contractors Ltd v Fareham Urban District Council (1956). In the Davis case it was held that a shortage of labour might make a contract more onerous to perform, but that was not sufficient to demonstrate frustration.
This being so, Brennan could have elected to sue Cockburn immediately the anticipatory breach was announced, or could have waited until August 20X6 when the beach would have been confirmed. It did neither, and as Cockburn has completed the work under the original contract by the due date it is entitled to the original contract price agreed.
Next comes the question of the new agreement in January 20X6. Does this constitute a binding contract? The answer will probably be ‘yes’ if Cockburn can show that additional consideration was provided for the additional sum of £30,000. Certainly the promise to complete the work by August 20X6 has economic value and may therefore potentially rank as consideration for the new money. But in the case of Stilk v Myrick (1809) it was held that the mere performance of a pre-existing contractual duty does not constitute valuable