Consideration however, must not be illegal. A contract isn’t valid if the consideration involved in it is illegal or immoral. Consideration also can’t be one-sided, it has to always move from the promise to the promisor, and that emphasizes the idea that there is a consideration in form from both the parties in a contract. Hence when one person makes a promise to the other, the other has to show consideration for that promise. Now in all valid contracts, consideration has to have some value, but there is no requirement needed for that value. It’s usually agreed upon both parties, the court however will not side with either parties who agree on considerations and then file complaints of making a bad deal.
Privity of Contract:
In contract law, contract formation means that the contract only creates rights between both parties. This means that if a third part can’t acquire any rights under the contract made between the other two parties. The relationship between third parties and the main parties is known to be a privity of contract. It is a legal concept that denies third parties the right to sue the contract made between the two other parties. An example of this is when one person promises another to pay a sum of money to a third person. Therefore in this situation, a contract is created between the first and second person, so the third couldn’t sue the first person for that money. Privity of contract is actually linked with consideration, which is one of the most important ways for a third party to become either liable or to gain rights on a contract.
Contracts (Rights of Third Parties) Act 1999:
This act allows third parties to have rights in contracts that affect them, which makes them a statutory exception to privity of contract. Under this act, third parties have rights, limited ones however, which are limited by the terms and conditions of the actually contract. The parties must give limits and define what rights are to be given to third parties during the negotiation stages. To be able to gain rights under this act, the third party have to be clearly identified through names, classes, descriptions and so on. They however, don’t need to be existing yet as long as that as well is clearly identified. Due to this, many remedies will be available to third parties, and it will be as if they were part of the actual contract which is made between the original parties.
Capacity in Business Situations:
After an offer is made, accepted and considered, it is important to look at whether or not he person entering the contract has the legal capacity to enter it. This is extremely important if the contract is to become of existence between the parties. Capacity as applied to business situations relates to whether or not a person has the legal power to enter the contract. There are main classes of people that only have limited capacity in entering legal agreements, those classes are;
-
Minors: Minors are people who are under the legal age of 18, at then they are generally unable to make any contracts. There have been many legal rules developed in order to help protect minors from contractual liabilities. There are also legal rules developed to allow minors to enter agreements but with limited circumstances. There are two types of contracts that could bind a minor when dealing with adults. The first one for the supply of necessary goods and the second for employment. The Sales of Goods Act 1979 has allowed contracts for the supply of necessary goods and services and beneficial contracts of service to be able to bind a minor. This Act defines the necessities as good that are suitable to the condition in the life of the minor and to his actual requirements at the time the sale and delivery have been made. When taken to courts, necessities are looked at in the context of the social and financial background of the minor that is involved. Items such as luxury goods and services are excluded as they are not yet seen to be necessities in the life of the minor. On the other hand, a minor is only bound to contracts of employment, apprenticeship and education only if the entire contract is for the benefit of that minor. A minor who sets himself up in business won’t be bound by trading contracts, even if they are deemed for his own benefits. Hence, a minor will not be liable for the repaying of the price of goods if he fails in delivering them. If a fraud contract is created however, it is considered to be binding to the minor.
-
Incapacitated People: People who are suffering from mental health conditions are unable to enter into a valid contract due to them lacking the sufficient mental capacity to understand what they are or will be doing. The Mental Health Act 1983 however, allowed the court to enter valid contracts on the behalf of a mentally ill patient. The court can also continue contracts that were entered and created before that person became ill. If a person is temporary insane, or suffering from a drinking or drug problem, any contracts made during that time can be voidable by providing proof that at that time of negotiation, they had no idea or understanding of what they were doing or of what was going on. The other party to the agreement knew this or should have known it
Now I’ll be discussing a case study, and explaining the law in relation to the formation of a contract. In this case study, Angus runs a business selling computers. He placed an advertisement in the local paper stating that he is willing to sell a Bell Supreme for 500 pounds in cash, and that it will go to the first person who accepts it on Saturday, the offer is only valid for one day.
At first, Bobby saw the advertisement, and he immediately posted a letter of acceptance to Angus’s offer. The letter arrived first thing in the morning on Saturday and Angus read it before but decided not to deal with Bobby. Later that day Catherine was the first person to arrive at Angus’s shop in the morning. She offered him a check for 500 pounds but Angus refused to accept it and told her that she couldn’t have the computer. After that, Daniel passed by and asked Angus if he’ll keep the offer open until Monday so that he could get to the bank and get his cash, Angus agreed to that. As a pleasant gesture, Daniel gave Angus 50 pounds to not sell the computer before he returned to him on Monday. Then later that day, Eva offered him 600 pounds in cash for the computer and Angus agreed immediately to sell it to her. Eva said she’d pay and pick up the computer on Monday afternoon. Come Monday morning, Daniel returned with his money to complete his purchase but Angus refused to sell to him anymore. Daniel subsequently went to another computer shop and bought the same computer but for 800 pounds. In that afternoon, Eva phoned Angus and said that she longer wished to buy the computer anymore.
Now I’ll be talking about the types of contracts that Angus actually made with each of his customers and I’ll explain the law related with those situations.
Angus and Bobby:
Bobby was the first person to get back to Angus on his offer through post. Acceptance by post is considered one of the exceptions to the main rule that acceptance must be communicated with the person making the offer, hence when posted, acceptance is considered to be immediately effective as long as the letter is correctly addressed and the stamped envelope is posted in a letterbox. The postal rule states that when agreed that parties will use the post as a mean of communication, the postal rule will apply. Angus however stated that the computer will go to the first person who accepts it on Saturday, and by person he means the first one who comes to his shop, and meets him in person there. He never just said that the first person who accepts will be the one he sells the Bell Supreme to, so despite Bobby being the first to accept, he wasn’t there in person. Bobby would’ve been be the rightful owner of the new Bell Supreme as he was the first to accept Angus’s offer on Saturday, but since Angus stated that it was to be in person, he wasn’t bound legally to Bobby in any way. Bobby can’t sue Angus for not accepting to work with him as Angus never mentioned the first to accept it by post will get the computer, so Bobby as no right to sue Angus over anything. A contract wasn’t formed to begin with.
Angus and Catherine:
Catherine was the first person to arrive at Angus’s shop on Saturday morning and she offered Angus a check for 500 pounds for the computer, one that Angus has refused. Now looking at this from a legal aspect, Angus clearly stated that he wants to sell the Bell Supreme for cash, not any other means, such as the check he was offered. So legally, Angus had the right to reject Catherine’s offer for a contract as his offer stood firmly by the condition that he would sell for cash.
Angus and Daniel:
Later on Saturday, Daniel asked Angus to keep the offer open till Monday and he gave him 50 pounds to wait for him until then and not sell the computer. By giving him the 50 pounds, Daniel has already gone into contract with Angus as there has been an advanced payment for the good. Daniel was rejected the chance to complete his purchase on Monday, and that is something he can sue Angus for as he already went into contract with him by giving him the one he did on Saturday, so Angus had no right to refuse to allow him to complete his purchase. A contract has already been formed and Daniel could sue Angus for damages after having to buy the computer from another store for 800 pounds and he could ask for a refund of his money. Since the contract was valid for one day only, and Daniel proposed a counter-offer to Angus as he would pay him on Monday, a counter-offer that Angus accepted, they are legally bound to a contract. Daniel also paid 50 pounds as an advanced payment to Angus, so by not agreeing to sell him the computer on Monday Angus committed even more of a crime. After refusing to be sold the computer, Daniel went on to buy the same computer for 800 pounds. So basically Daniel has spent 350 pounds more than he was supposed to due to Angus’s actions. Daniel can sue Angus for damages and ask for a refund of his money and the extra money he paid.
Angus and Eva:
Eva passed by Angus’s store later that day and offered him 600 pounds in cash for the computer, an offer that Angus finally agreed on. Eva told him that she would pick up the computer on Monday afternoon, and it took Angus until then to find out that she no longer wished to buy the computer after she phoned him. Upon accepting Angus’s offer on Saturday, Eva immediately went into contract with him there, so she had no right at revoking her acceptance come Monday. Eva is legally at fault for her actions, and Angus has a right to sue her. Seeing as how Eva had no reason to revoke her acceptance of Angus’s offer, so the contract wasn’t breached or anything of that matter, hence why Eva is at fault here. Angus has the right to sue Eva for the money as he went into contract with her and she had no reason to revoke her acceptance. Angus can sue her for the 600 pounds that she promised him.
Contracts were only valid with Eva and Daniel. There was no contract made with Bobby, as his acceptance was rejected by Angus in the first place. There was no contract with Catherine as well, due to her means of payment that didn’t agree with the conditions of the offer that Angus originally made. Daniel made a counter-offer, one that Angus accepted, so there was a contract made then. Daniel should’ve been the rightful owner of the computer as he also paid some money to Angus in advance. Eva also had a valid contract with Angus as he also accepted her counter-offer, when she offered him 600 pounds instead of his proposed 500. So there were two valid contracts in this situation, but considering how Daniel was the actually the first to get accepted, it’s he who should be the rightful owner of that computer.
Neither Bobby or Catherine can sue Angus for anything, as he wasn’t legally bound by contract to either of them, and they didn’t meet the conditions of his offer so he had every right to reject working with them. Daniel however can sue Angus for his money and the breach in contract made by Angus when he made another contract with Eva. Angus on the other hand can sue Eva for revoking her acceptance after getting into contract with him for no clear reason. Angus was at fault for not finishing his part of the deal with Daniel, and Daniel should be the rightful owner of the computer.
In this task I will describe the law in respect to the case study given at hand. I will also analyze the impact of the requirements for a valid contract in the given situation stated above.
There are 3 main different types of misrepresentations;
Fraudulent Misrepresentation:
“A person will be liable for fraud if they make a statement which they know to be false or they have no belief in its truth or they are reckless or careless whether it is true or false. In such a case, an injured party may reject the contract and also sue for damages for the tort of deceit. Furthermore, the person committing fraudulent misrepresentation may also be prosecuted in the criminal courts for fraud.” (Dooley, 2010)
Negligent Misrepresentation:
“Negligent is a concept which arises in . In general, misrepresentation refers to a situation in which someone makes a for the purpose of making a deal, resulting in the person who relies on the statement experiencing harm. In the case of negligent misrepresentation, someone makes a statement without any grounds for knowing whether it is true or not. An aspect of carelessness is involved in negligent misrepresentation. If a car dealer claims that they believe the previous car owner changed the oil without actually knowing it to be true, they may be committing negligent misrepresentation.” (WiseGeek, 2012)
Innocent Misrepresentation:
“An innocent misrepresentation is a false statement made by a person who had reasonable grounds to believe that it was true, not only when it was made but also when the contract was entered into.” (Dooley, 2010)
Now in relation to the case study I was given, the proper misrepresentation in that case was fraudulent misrepresentation. Shirley wanted to set up an airplane service for business people flying from London to Rome or vice-versa. She was in need of an aircraft that will enable her to fly between two cities without the need to refuel. Dorrianne, the seller, has informed her that the aircraft she’s willing to sell will enable her to do so, so Shirley purchases the airplane for 5 million pounds and sets up her business. While on a trial flight to Rome, Shirley is forced to land and refuel before she reaches her destination, and after further investigation she discovers that the aircraft she bought is only suitable for short flights and doesn’t have the capacity to fly the distance that she requires using only a single tank petrol. As a result of this, Shirley is forced to abandon her business plans. She then finds out that the aircraft she bought is actually worth 1 million pounds less than what she paid for, and in addition to that, she has incurred considerable expenses in setting up her business which was expected to earn a substantial profit. So there has been clearly a misrepresentation by Dorrianne as she stated that the aircraft she was selling Shirley actually meets her requirements. This type of misrepresentation is known as fraudulent misrepresentation. There are very slight to no chances that it was negligent or innocent misrepresentation as it would be very hard to believe that one would not know the kind of aircraft they own. Dorrianne has stated to Shirley that the aircraft she’s about to sell her meets her requirements, when it clearly did not. Not only that, but she also sold her the aircraft at an even higher price than what it’s really worth.
There are six factors that have to be satisfied for this to be considered a fraudulent misrepresentation, these factors are;
- A party must make a false representation
- The misrepresentation is material to the transaction
- The misrepresentation is made with knowledge that is false, or with reckless disregard as whether or not it’s true
- The misrepresentation is made with the intention of inducing the other party to act or to refrain from acting
- The other party has to rely on the lie
- The lie must also cause the other party to suffer damages
As we can see, all the above factors have been satisfied in Shirley’s case. Dorriane has clearly made a fraudulent misrepresentation in an attempt to fool Shirley.
Misrepresentations fall under civil offenses, which means that one can only sue in the civil court. The general remedy or solution for all such cases in civil court is rescission. This means that the court will act like the transaction or contract never actually existed, and everything goes back to the way it was. However, fraudulent misrepresentation requires intent on the part of the perpetrator, which is considered very much more serious than the other types of misrepresentation. Hence, in such cases, the court allows damages. This means that one will have to pay for any losses suffered by the buyer when relying on the lie. This is very much the case for Shirley, she has received an aircraft which she was told can travel the distances of those two cities without having to stop by for refueling, and now as she found out that she has to, that harmed her business and kept her from performing her job. This allows the court to require Dorrianne to pay back Shirley for the business she has lost.
In conclusion, Shirley will be able to sue Dorrianne for not only rescission, but also for damages. Shirley can either get her money back in exchange for the aircraft, or she can sue Dorrianne for any damages she caused her, such as having to abandon her business plans and for the considerable expense she has incurred due to paying more than what was required.
A valid contract means that a contract is legally binding and enforceable. A party can sue another over a breach in the requirements of a valid contract, such as the above given situation. Dorrianne has breached many of the requirements of the contract which has had a great impact on Shirley and her business. Dorrianne lied about both the specifications of the aircraft and its price, which has led to Shirley eventually abandoning her business plans.
The requirements in the valid contract by Shirley were that the aircraft would be able to fly her between London and Rome without the need to stop for refueling. This was one of the main requirements asked by Shirley. Dorrianne informed her that this aircraft would enable her to successfully complete her trips without having to stop for refueling, something that was clearly wrong. Dorrianne also sold Shirley the aircraft at 1 million pounds more than what it’s actually worth, something which has unsettled Shirley in her business.
The impact that these requirements, if true, for Shirley would’ve allowed her to successfully carry on with her business plans and would’ve kept her from incurring a considerable expense in setting up her business. However, due to the fraudulent misrepresentation by Dorrianne, Shirley was forced to shut down her business as the aircraft was unable to fly between the two cities without the need to refuel. Shirley also incurred a considerable expense by having to spend 1 million pounds extra at 5 million pounds on the aircraft which cost only 4 million pounds.
This means that there has been a breach in contract by the offeror, which makes the contract invalid. There has been a breach of conditions made by Dorrianne, as the product clearly didn’t match the requirements promised to Shirley. This can immediately lead to the contract either becoming invalid and to terminate. There are also other remedies for such situations such as damages, mitigation, rescission and so on.
It is up to Shirley to which case to pursue Dorrianne at and what to sue her for, but given that there was a huge impact on Shirley and her business due to Dorrianne’s action, it would be highly unlikely that Shirley would just go for rescission. Dorrianne might have to pay many damages that she has caused for Shirley, unless she can prove otherwise that this was an innocent misrepresentation or a negligible one, which is very highly unlikely. Dorrianne’s actions that have impacted the requirements for the valid contract has caused Shirley to shut down her business and lose considerable expenses so there has been multiple breaches in the contract by the offeror which makes it invalid and Shirley would have the option to terminate the contract immediately or sue for other charges.
References:
Bevan, J. Dooley, D. Goymer, J. Richards, C. Richards, N. (2010). BTEC National Level 3 Business Book 2. England: Pearson Education Limited. 80-.109
What Is Negligent Misrepresentation?. 2012. What Is Negligent Misrepresentation?. [ONLINE] Available at: http://www.wisegeek.com/what-is-negligent-misrepresentation.htm. [Accessed 19 July 2012].
Fraudulent Misrepresentation Lawyers | LegalMatch Law Library. 2012. Fraudulent Misrepresentation Lawyers | LegalMatch Law Library. [ONLINE] Available at: http://www.legalmatch.com/law-library/article/fraudulent-misrepresentation.html. [Accessed 19 July 2012].