Andrew Mudrek
group 3 course
Contract Law
Odessa 2008
Donald Diggers Ltd tenders for the contract to construct a new hotel for Opulence Ltd. Donald quotes a highly competitive price on the basis that the contract is concluded on its standard terms. Opulence awards Donald the contract, which is duly signed on Donald's terms.
Initially, work proceeds smoothly and according to schedule. However, Donald's workforce is affected by an outbreak of bird influenza and it proves extremely difficult to hire the replacements needed to keep the project on schedule.
Donald is forced to pay premium rates. Donald approaches Opulent to see if Opulent will share the additional cost. Opulent needs the hotel to open on time as it has invested a considerable sum in publicizing the opening and hiring a top celebrity to perform the opening ceremony. All this will be wasted if the opening is delayed. Opulent therefore agrees to contribute $5,000 to the additional labour costs.
The work is completed on time, the opening goes ahead and the first guests arrive. Soon, however, problems start to appear. The swimming pool proves to be only six feet deep instead of seven feet as specified in the contract and it is marked on the outside of the pool. One of the guests breaks his nose after diving in. Some guests contract food poisoning after eating in the one the hotel restaurants. Overall, considerable adverse publicity has been generated, future bookings are low and some bookings have been cancelled.
When Opulent complains to Donald, the latter responds that the food poisoning has nothing to do with its work. Moreover, in respect of the swimming pool, Donald points out that all Opulent needs to do is to change the sign on the side of the pool to indicate its true depth. The market value of the hotel, Donald claims, is unaffected by the shallower pool. Moreover, Donald refers to clause 4 of the contract, which provides as follows:
"All liability for defective installation of swimming pools, whether arising by reason of negligence or otherwise, is hereby excluded."
For its part, Donald is seeking payment of the additional $5,000. Opulent denies that it is legally liable to pay this in any event. Even if it so liable, opulent is withholding that sum by way of set-off against Donald's maintains that Opulent is legally liable to pay extra $5,000 and relies on clause 7 of the contract, which excludes any right of set-off.
DISCUSS. IT IS NOT IN DISPUTE THAT THE FAILURE TO CONSTRUCT THE SWIMMING POOL TO THE CONTRACTUAL SPECIFICATION QUALIFIES AS "DEFECTIVE INSTALLATION" WITHIN THE MEANING OF CLAUSE 4 OF THE CONTRACT.
Issues:
There are four areas of contract law that have to be discussed when considering the issues in this scenario, which are; frustration; duress; and the validity of the exemption clauses. It must be noted that at this point the food poisoning is factor outside of the contract between Donald and Opulent and cannot be any point of claim against Donald. Therefore this discussion will look at the validity of the exclusion clauses and the variation of contract.
Application of the Law to the Issues:
Exclusion Clause:
In order for Opulent and Donald to be bound by the exclusion clause there needs to be a valid contract, which means that four requirements have to be fulfilled. A valid contract must have the following elements; offer; acceptance; consideration; capacity; and intention. These are present in this contract when Donald offers his work and Opulent accepts verbally. There is also intention because there is an understanding that Donald will turn up to work on a certain day and Opulent will close the night club, which is evidence of consideration as Opulent is at a disadvantage.
This is a valid contract, however the next area to explore is whether the exclusion clause and standard terms apply because Opulent has never worked with Donald and at the verbal contract point does not indicate what his usual terms and conditions are. Under contract law there are only three ways that they can be incorporated which are; by signature even if they are not read; by notice where there has to be sufficient notice; and by custom where there has been previous dealings between the parties even if the clause is added in later. In this case ...
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This is a valid contract, however the next area to explore is whether the exclusion clause and standard terms apply because Opulent has never worked with Donald and at the verbal contract point does not indicate what his usual terms and conditions are. Under contract law there are only three ways that they can be incorporated which are; by signature even if they are not read; by notice where there has to be sufficient notice; and by custom where there has been previous dealings between the parties even if the clause is added in later. In this case there is a signature but there is no indication of previous dealings, hence Opulent may not bound by these conditions yet. Therefore one has to consider the case of notice, off hand there is no notice as Donald fully indicates what these conditions and the question is whether the average person would have notice, especially as Donald is an builder and Opulent as a business and these could be construed as standard conditions in the business; but this would be easy to prove as notice was given due to Donald giving these terms and conditions before the contract was agreed and giving a good indication of their nature at this level. In this case the terms were fully expressed but under contract law there could be one problem with the contract if Opulent has received the contract in their hands and failed to read it the case of Alderslade v Hendon Laundry Ltd if the exclusion clause can only be construed in negligence and in certain circumstances then it is applicable and as Opulent received the usual terms and conditions before Donald started the work, i.e. they had a chance to end the contract then they are bound by them. However, the case of White v John Warwick & Co has held that liability for negligence will not normally be excluded. Therefore it is still very confusing whether Donald is excluded from the damages that Opulent is seeking, therefore the statutory provisions of the UCTA and Sale and Supply of Services Act 1982 (SGSA).
Is Donald is liable for the damages that Opulent is asking for? In response there is little evidence in whether the exclusion clauses should be supported or not. Under UCTA Section 2 it holds that negligence cannot be excluded in respect to personal and/or death bat all. In relation to other loss/damage liability cannot be excluded unless there is reasonable notice. Section 11 holds that the reasonable test is that the term is fair and reasonable and whether the individual should have reasonably known or in contemplation of when the contract was made. This is similar to the case law discussion; however it is written from the point that negligence can not be excluded except in strict circumstances. There was no real notice in this case, especially when the verbal contract was made. Therefore it is very likely that this clause will not be upheld as the case of Andrews Bros (Bournemouth) Ltd v Singer and Co Ltd holds that exclusion clauses against the party seeking to rely on them. This is important for the liability in respect to Donald and his employees and any injuries and subsequent economic loss from the negligent wiring. Yet in relation to the damages to Opulent it has to be determined if there is remoteness of damage, whereby monetary compensation can be claimed for a failure to perform a primary obligation as this is a breach and/or the loss for any breach of a secondary obligation. The primary obligation was to construct a hotel to certain specification, which Donald did negligently in respect to the swimming pool as he built it the wrong depth and then gave the wrong depth measurements causing danger for persons using the pool. Therefore it is highly likely that Opulent can claim damages under breach of contract. The secondary obligation was to complete this task by a given date, which he did do but due unforeseen circumstances a variation of the contract occurred and Opulent owes a further $5000 and the question is whether they are liable to pay this to Donald. In respect to the negligence that has caused personal injury to persons the law states that this cannot be excluded under Section 1(2) of the UCTA, therefore it has been shown that Opulent may claim for this. In respect to not paying the $5000 because of the negligence and the loss of profits due to the bad publicity because of the negligence can Opulent claim against it, however does the exception clause apply? Again we must turn to whether there is reasonable notice to exclude liability and under the SGSA Section 16 where restricting liability for breach of implied terms arising from Sections 13-15 is subject to the reasonable test and provisions of the UCTA, where the reasonableness test is based upon the common law officious bystander test that is defined in Sir Law v Southern Foundries Ltd which is a stricter test for exclusion clauses where it has to be so reasonable and that the notice is sufficient that the officious bystander would agree to its terms. This basically holds that there are implied terms such as a reasonable quality of goods and services and that it should be completed in a reasonable quality and should be usable. This means that the exclusion of liability for faulty equipment and liability for faulty work cannot be excluded. This means that these two exclusion clauses cannot be upheld. In respect to the negligent completion of work i.e. was there reasonable excuse for the negligence. Yet it was an express term of the contract and without reasonable excuse this exclusion clause it is possibly not going to be upheld, this is rule from an early common law principle. Yet there is the question whether this is reasonable exclusion for the trade. However, as in the case of Edmund Murray Ltd v BSP International Foundations Ltd it was held that it was not fair and reasonable for the party in breach to rely on an exclusion clause for failing to meet the specifications of the other party. Therefore this again will be subject to the reasonableness test where the test applied to the whole term and to the particular reliance on it. Therefore if it is a specific term of the contract to be finished by the certain date and made clear by Opulent and Donald did this as it was then it is very likely it can be excluded because it is a trade standard. Finally, if one considers the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) if the term does not create an unfair balance in detriment to the consumer it can be upheld. Yet as this does create an unfair balance and puts Opulent at a loss then they will be protected from the exclusion clause as a consumer, even though she is acting for her business. However are the circumstances of this variation sufficient enough for Opulent to claim? If the swimming pool was properly marked the work would have been finished within the time period would variation to the contract be acceptable? Therefore is there a reasonable excuse for the variation and did both Opulent and Donald have equal bargaining power? The first question to ask is whether the circumstances that lead to the variation of the contract would have frustrated the contract, if the variation is perfectly acceptable as long as Opulent was not put under duress to accept the new terms.
Frustration & Duress:
Frustration is an act outside the contract that makes it completion impossible, a good example of this is in marine contracts where a delivery is specified for a certain date and time but the crossing is so bad that the delivery cannot be made on time. This would be an example of frustration of that part of the contract and no breach would be held as long as the goods were delivered at the nearest possible time. Frustration of a contract and what it constitutes is usually seen via exclusion clauses, such as advising that liability will not be held for incomplete contracts or damage due to acts of God, nature etc. Other examples of what may frustrate a particular contract may also be present also, i.e. unforeseen acts, third parties etc. in the case of Davis v Fareham illustrated frustration is the last option to be taken.
Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.
It is common practice that just because a contract has become too expensive that it is not frustrated, unless the other party start making unreasonable late and highly expensive variations; whereby a lump sum contract is frustrated so that the contractor can recalculate his lump sum. Also as noted earlier any clause that defines force majeure must comply with the UCTA 1977. The key question is whether the act is completely outside the contractor's control that it is no longer performable. However the court is prepared to give the terms of the contract their widest meaning i.e. the parties' intentions, because what is the point of creating a valid contract and then deciding it is no longer desirables and using a clause that brings about frustration creating an unfair situation for the other party. The Court of Appeal in The Marine Star argued the correct approach was through the actual words used because these exclusionary clauses are restrictive in nature; however the correct is approach still points to one outcome the limited use of force majeure. Frustration can be the physical destruction of the subject matter of the contract, i.e. a fire burns down a concert hall. It can also be due to extraneous circumstances, such as the Guns 'n' Roses Case where the health and safety department declared the stadium unsuitable so the contract was frustrated as the band could not perform. Impracticability is another example of frustration, i.e. the circumstances have changed radically so the contract cannot be performed. The best example of how extreme the circumstances have to be to equate to frustration of contract can be seen in the leading authority of Jackson v Union Marine Insurance Co Ltd:
A ship was chartered in the November to proceed with all possible despatch, all dangers and accidents of navigation excepted, from Liverpool to Newport to load a cargo for carriage to San Francisco. The ship ran aground on 3 January in Carnavon Bay. She was later refloated by 18 February and taken to Liverpool. The charterers repudiated the contract on 15 February. The question was whether the charterers were liable for not loading the ship, or whether the time likely to be required for repair (the ship was still under repair in August) was so long as to excuse the charterers. On this finding by the jury, the court held that the adventure contemplated by the parties was frustrated and the contract discharged. The contract term, read literally, did cover what had happened, and it would have stopped the charterers from recovering damages in the event of delay, but it was not intended to cover an accident causing injury of so extensive a nature.
The frustration of contracts is highly restricted, therefore a defence or action in frustration of contracted is limited because the key point is a valid contract has been made and the good faith it has been structured upon should be respected; unless a situation so extreme occurs that it is unfair and impossible for the contract to be performed. In this case all the workers got sick creating a situation where Donald could not complete the work in time. It is highly possible as the circumstances were so extreme and unforeseen that Donald and Opulent's contract would have been frustrated. Therefore the extra payment would payable by Opulent and as the term of no right to set off is a standard trade term and Opulent is a business then they would have to pay the money and sue for breach of contract in respect to the negligent work. The final question is whether Opulent was under any duress and of so this variation would not be upheld, i.e. this is a question of equal bargaining power. The question is whether Opulent had no choice but to accept the terms because of the necessity of the finishing date and there was no choice; however the circumstances seem to indicate there was no force or ultimatum given by Donald rather a re-negotiation of the terms due to the unforeseen circumstances of the workers getting ill. Even though there may be some inequality of bargaining power between Donald and Opulent, i.e. the hotel needs to be finished this does not amount to duress in commercial dealings. Therefore it is highly likely that the extra $5000 is an acceptable variation to the contract and Opulent will have to pay because of the standard term in respect to set-off.
Advice to Opulent & Donald:
Donald would most likely get his $5000 and can have his clause in respect to set-off upheld; however he will not be able to rely on his exclusion clause in respect to the swimming pool. Opulent would have a cause of negligence action in respect to breach of contract with the respect to the swimming pool and would have to take this action because they are unable to set off the $5000 because of the standard term against set-off.
Bibliography:
* J. Beatson (1998) Anson's Law of Contract 27th Edition, Oxford University Press
* Buyer (The), 2002, Aspects of Frustration, Buyer 24(12)
* Groves, 2004, Force Majeure, Bus Ad 2.10 (2)
* David Kelly, Ann Holmes & Ruth Hayward (2002) Business Law 4th Edition, Cavendish
* Lunney & Oliphant, 2000, Tort Law: Text & Materials, Oxford Uni Press
* Ewan McIntyre, (2004) Business Law, Longman