Contract Law

In an environment where legal concepts are created, challenged, or defeated in court on a daily basis, the legal landscape can shift rapidly. Lawyer 2B will be running a series of legal round-ups detailing recent developments of note in each of the core subjects of the law.


Contract has never been considered the most exciting of the core subjects. However, there have actually been some interesting contract decisions over the last few months.

The Court of Appeal has re-examined the basic concepts of offer and acceptance, incorporated terms, breach of contract, and mistake in order to clarify the application of these well-established principles and make them relevant to the modern contract.

Parliament has also legislated in this area, finally allowing third parties to sue where a contract expressly or purportedly allows them to. This significantly reforms the rule of privity of contract under which only the parties to a contract had the right to enforce it.

Cases – Offer and Acceptance

Northern Foods Plc v Focal Foods Ltd
(2001), CA, LTL 23/7/2001 EXTEMPORE

This appeal focused on whether a contract existed, based on the principles of offer and acceptance.

In 1997 the defendant provided a price for which it would supply food products to the claimant for a set term of three years.

The claimant then wrote to the defendant to offer a three-year contract for the supply of goods at the stated price.The defendant discovered that it was making a loss and increased the price of the goods. The claimant then sought damages for a repudiatory breach of contract.

The judge at first instance held that the claimant’s offer letter did not create a binding contract between the parties because, although the price was the same as that stated by the defendant, the content of the letter was uncertain about the amount of produce to be ordered and supplied. The Court of Appeal disagreed.

Both parties had sought to enter into a long-term supply and purchase agreement, with the intention of overcoming the uncertainties of price. The Court of Appeal found that the claimant’s letter was an offer to purchase goods at the stated price and that it was accepted by the defendant’s conduct in supplying the goods.

Accordingly, there was a binding contract between both parties that the defendant had breached in refusing to continue the supply at the stated price.

In contrast, Smith v Artsana Spa (2001) (CA, LTL 18/7/2001 EXTEMPORE), there was no acceptance of an offer letter seeking clarification of details and requiring an unequivocal answer because the defendant’s response was equivocal.

Hugh Tomlinson of Matrix Chambers and Thomas Grant of 9 Old
Square instructed by Walker Morris (Leeds) for Northern. Patrick Lawrence of 4 Paper Buildings instructed by Ormsby (Burton-On-Trent) for Focal.

Terms and Conditions

O’Brien v Mirror Group Newspapers Ltd
(2001), CA, LTL 1/8/2001

The claimant in this case received a scratch card in “The People” that stated he was entitled to a cash prize of 50,000. However, as the result of an error, too many winning scratch cards were printed and the defendant held a draw for the winning card-holders in which the claimant was unsuccessful. The defendant successfully argued that the contract between the parties was governed by a standard set of terms and conditions, which included a provision for a draw to take place in the event that more prizes were claimed than were available (rule 5).

Although the terms and conditions were not always printed in full, they were referred to each time the competition was announced, incorporating the term “normal Mirror Group Rules apply”. The judge held that this was not onerous, outlandish or unusual but simply deprived the claimant of a windfall for which he had done very little in return.

Jonathan Crystal of Cloisters instructed by Hills or Brien.
Christopher Carr QC and Sa’ad Hossain of One Essex Court instructed by Lovells for MGN.

(1) Hertford Foods Ltd
(2) TSB Commercial Finance Ltd v LIDL UK GMBH
(2001), CA, LTL 20/6/2001 EXTEMPORE

The parties in this case entered into a contract for the supply of food without resolving whose terms and conditions should be incorporated into the contract. The claimant invoked a force majeure clause in its standard terms and conditions after shipping arrangements were disrupted by forces outside its control forcing the defendant to purchase goods elsewhere.

Given that the parties had not reached agreement on which set of conditions should apply, the Court of Appeal found that the contract was governed by general law which did not contain a force majeure provision. The claimant was, therefore, in clear breach of contract, which the defendant was entitled to treat as repudiatory.

Andrew Hochhauser QC and Vernon Flynn of Essex Court Chambers instructed by Eversheds (Birmingham) for Lidl.

George Leggatt QC of Brick Court Chambers and David Fisher of 199 Strand instructed by Male & Wagland (Potters Bar) for Hertford.

(1) Britvic Soft Drinks Ltd
(2) Bass Brewers Ltd
(3) Thomas Hardy Packaging Ltd
(4) Brothers Drinks Co Ltd

v

(1) Messer UK Ltd
(2) Terra Nitrogen (UK) Ltd
(2001), QBD Commercial Court, LTL 15/8/2001

The first defendant in this case had a contract with the claimants to supply liquid carbon dioxide manufactured by the second defendant, used by the claimants in the manufacture of carbonated drinks. The claimants re-called
drinks already distributed after discovering that they had
been contaminated by benzene in the carbon dioxide and sought damages for breach of contract.

The defendants argued that the supply contract was only required to conform to British Standard 4105 which excluded the statutory implied terms on satisfactory quality and fitness for purpose.

However, the Court of Appeal held that the supply contract
was not limited to compliance with BS 4105. The contract was for the supply of carbon dioxide for an industrial food/drinks application and the claimants were entitled to assume that the carbon dioxide did not contain anything inconsistent with that application. The contract contained implied terms on quality and fitness for purpose, which the first defendant had breached.

Anthony Boswood QC of Fountain Court Chambers and John McCaughran of One Essex Court instructed by Nicholson Graham & Jones for the claimants. Christopher Symons QC and Juliet May of 3 Verulam Buildings instructed by Herbert Smith for the first defendant. Andrew Prynne QC, Charles Gibson QC and Geraint Webb of 2 Harcourt Buildings (Roger Henderson QC) instructed by Eversheds for the second defendant

Breach

Fortman Holdings Ltd
v
Modem Holdings Ltd
(2001), CA, LTL 30/7/2001

In this case, the defendant had agreed to purchase the issued share capital of a company from the claimant for a total sum of 30 million – 20 million on completion with the balance to be paid by instalments.

The defendant failed to pay the first instalment of 1 million. The contract between the parties stated that 10 million would become immediately payable in the event of a “material or persistent” breach by the defendant.

The judge at first instance gave judgment for the claimant
in the sum of 1 million plus interest but declined
to give judgment for the entire 10 million on the ground that a failure to pay 1 million of 10 million was not a material breach of the defendant’s obligations.

The Court of Appeal disagreed, holding that the failure to
pay the first instalment breached the defendant’s entire obligation in relation to that instalment and was, by default, material.
The claimant was therefore entitled to the entire sum of 10 million.

Peter Smith QC and Mark Harper of 40 King Street Chambers (Manchester) for Fortman. Christopher Moger QC and David Sears of 4 Pump Court for Modem

Mistake

Shogun Finance Ltd
v
Hudson
(2001), CA, LTL 28/6/2001

This case centred on a new car purchased using someone else’s identity. The dealer arranged the finance for the car through the claimant.

After paying the deposit, the fraudulant buyer sold the car
to the defendant, who purchased it in good faith. The Court
of Appeal held that the defendant had not in fact obtained good title and was liable to the claimant.

Sedley LJ, dissenting, found that s.27 Hire Purchase Act 1964 protected a bona fide purchaser so that the claimant should bear the loss. All three judges expressed the view that the law in this area was in need of clarification.

Jeremy Cousins QC of 7 Bedford Row and Nicholas George of 2
New Street instructed by Rich & Carr for Hudson. George
Bompas QC of 4 Stone Buildings and Sunil Iyer of Bracton Chambers instructed by Sechiari Clark & Mitchell for Shogun

Legislation

Contracts (Rights of Third Parties) Act 1999

This Act came into force on 11 November 1999 and applies to
contracts entered into after 11 May 2000. The Act reforms
the rule of privity of contract under which a person can only enforce a contract if they are a party to it.

The Act sets out that a third party does have a right to enforce a term of a contract where it is expressly provided for in the contract or where the contract purports to confer a benefit.