Legal Considerations for Entering into Property Contracts

Turner has decided to start her own business running a private day nursery. It is necessary for her to find appropriate premises. She sees a detached house, which would be appropriate, on the market for 200. 000. After having viewed the property she decides to make a bid for the property for  150,000. The sellers state clearly however that they will only accept  180,000. Mrs. Turner then sees another property on the market for 250,000.

She offers the asking price for this and it is accepted ‘subject to contract. However a week later the sellers of the first property contact Mrs. Turner again stating that they have reconsidered are now happy to accept her bid for 150,000. Your supervisor has requested that you research the relevant issues and compile a report for her attention which, outlines your findings. Answer Prior to examine whether Mrs Turner has entered into two contracts, we started with the definition of “Contract”. A contract is defined in Section 2(h) of the Contracts Act 1950 as “an agreement enforceable by law. In other words, a contract is an agreement which is legally binding between the parties. A legally enforceable contract requires:

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1.  An Offer
2. An Acceptance
3. An intention to Create legal relations
4.  Consideration
5. If any of the above is missing, then there is no contract to speak of.
6. Section 7 of the Contracts Act 1950 states that:
7.  In order to convert a proposal into a promise the acceptance must: a. Be absolute and unqualified; b. Be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted.

If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in that manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insists that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance. For the first property (market price of 200,000) that Mrs. Turner had viewed and offered a bid price of  150,000, the seller had rejected the offered and state clearly that they will only accept 180,000.

From Contracts Act 1950, acceptance must be absolute and unqualified so that there is complete consensus. If the parties are still negotiating, an agreement is not yet formed. However a week later the sellers of the first property contact Mrs. Turner again stating that they have reconsidered and are now happy to accept her bid for ? 150,000. From the case of <<Hyde v Wrench [1840] 3 BEAV 344-49 ER 132>>: The defendant offered to sell his estate to the plaintiff on 6 Jun for ? 1000. On 8 Jun, in reply, the plaintiff made a counter-proposal to purchase at 950.

When the defendant refused to accept this offer on 27 June, the plaintiff wrote again that he was prepared to pay the original sum demanded. The court held that no contract existed between them. The plaintiff had rejected the original proposal on 8 Jun so that he was no longer capable of accepting it later. Draw from the case above, the seller of the first property has no longer capable to accept Mrs Turner bid for 150,000. Mrs. Turner is eligible to view the property again if she suspects there is a hindered defect on that property where cause the seller willing to drop the price after a weeks.

Hence, Mrs. Turner may counter-proposal to purchase at a lower price than 150,000. For the second property (market price of 250,000), Mrs. Turner offered the same bid price of 150,000 and seller accepted the offer but “subject to contract”. Where acceptance is qualified by words such as “subject to contract”, the courts would be inclined to hold in the absence of strong and exceptional circumstances to the contrary that there is but a mere conditional contract. To both parties which is seller of second property and Mrs.

Turner, the terms “subject to contract” actually is a secure way to protect both of their benefit. For Mrs Turner, this means that she can pull out of the deal anytime if, for example, a survey shows up a defect or she might found another favorable property – though she can pull out for any reason. For the seller of second property, it would have allowed them to pulls out of a deal if they have had a higher offer. It must be noted that the mere use of the words “subject to contract” does not necessarily mean that the contract is not yet binding.

Whether the parties contemplated a binding contract to take immediate effect or whether they were postponing their rights and obligations under the proposed contract until formalization is a question of fact and depends on the circumstances of each case. Task 2 Mrs. Turner has now purchased a suitable property and is now purchasing the necessary items required to run her nursery. She looks on a website and sees cots and high chairs advertised for sale by a company named Babies R Us, on the 1st October 2003, requesting twenty cots and twenty high chairs, requesting a reply by the 21st November 2003.

She received a reply by post, confirming the order, on the 1st December 2003. This was postmarked 20th November. However on the 30th November, Mrs. Turner had assumed that Babies R Us were unlikely to reply and therefore, entered into a contract with a rival company. Mrs. Turner has made an appointment to see you to gain advice relating to the above problem. Equally, she would appreciate some advice relating to the formation of contracts by e-mail. Answer A contract offer has only been accepted when the acceptance is brought to the attention of the offeror.

The development of methods of communicating over distances, and the associated reliability problems, the case often arises when the offeree has dispatched an acceptance which either is never received by the offeror or arrives after the expiry of the offer. Section 4(2)(a) of the Contracts Act 1950 provides that the communication of acceptance is complete as against the proposer when it is put in a course of transmission to him so as to be out of the power of the acceptor.

With respect to the acceptor, Section 4(2)(b) of the Contract Act 1950 (Malaysia) provides that the communication fo acceptance is complete as against the acceptor (offeree) when it comes to the knowledge of the proposer (offeror). Mrs. Turner sends an offer to Baby R Us through email and requesting a reply by 21st November 2003. However, Mrs. Turner doesn’t stipulate the method of acceptance shall be by email or postal way. If no method of communicating acceptance is stipulated, the starting-point is that acceptance is made using the same method of communication as the offeror.

However, any reasonable way of replying will normally form a contract, the responsibility being on the person accepting to ensure that communication is effective. Lord Denning gave some examples in the following case. <<Entores Ltd v Miles Far East Corporation (1955)>>: He said that if two people are walking along either side of a river and a message shouted is obliterated by the sound of a passing aircraft, it is necessary to repeat the message until the person speaking is sure that the message is heard.

Similarly if a telephone line goes dead, it is necessary to redial and ensure that the message has been received. The burden on communication of acceptance is therefore firmly on the offeree in normal circumstances, and acceptance is effective on receipt. In Entores, a Dutch company accepted an offer by an English company, and the issue arose of where the contract was formed. It was held to have been formed in England, since that is where the acceptance was received by telex. From Mrs. Turner’s cases, Baby R Us shall reply the acceptance of order to her via email instead of postal method.

To consider whether acceptance via the post is reasonable, following factors should be considered: * Whether the offer was made by letter. If so, then it is usually acceptable to reply by letter, unless the offer specifically says that the post may not be used – see case <<Yates Building v Pulleyn (1975)>>: The offeror asked for acceptance to be by letter using registered or recorded delivery. The letter was sent by normal delivery, but it made no practical difference to the offeror, since the letter was delivered on time, so acceptance by this method was held binding.. Whether the offeror states that acceptance can be made by post, even though the offer may have been made in some other way. *Whether previous negotiations, or “course of dealing”, between the parties have established that is is normal to reply by post. If one of these situations apply, then it will generally be considered reasonable to accept by post. On the other hand, if the offer has been made in some other, more direct way, for example by telephone, by word of mouth, or in some other form indicating a fast reply, then postal cceptance would not normally be considered reasonable, unless the offeror says so. Therefore, postal rule is not applicable to this cases and Mrs. Turner was not bound to this acceptance. Forming contracts electronically is becoming increasingly common and there are many issues which businesses need to be aware of. How is a contract formed? Requirements may differ from jurisdiction to jurisdiction, but in general, no particular form of communication is required to create a contract.

In the countries we usually deal with, it may be done verbally, or in writing or electronically (through e-mail, electronic data exchange or a website). It is important to remember that however a contract is formed, the same basic legal requirements must be satisfied. There must be: 1. A valid offer has been made by one party to another 2. The offer has been accepted by the other party or parties 3. There is an intention by all parties to create legal relations when they entered into the contract 4.

The promises made within the contract are for valuable consideration 5. The terms of the contract are certain. In this fast paced IT driven environment, correspondence via email has had a significant impact on how business is conducted and consequently, the formation of contracts. Instant emailing has impacted on the speed and ease at which emails can be sent. In addition, their perceived informality has served the purpose of increasing the flow and level of communication which may pass between negotiating parties.

In Kenya, the Kenya Information and Communication Act (Chapter 411, Laws of Kenya) which under Sections 83J and 83K incorporate various provisions that recognize the formation of a valid contract via email. Recent case law from the UK now suggests that a chain of email correspondence can constitute a binding agreement, taking cognizance of the fact that in reality not all commercial agreements may be reduced in their entirety to one concise executed document. In the event of a dispute, the Courts play the role of firstly determining whether a contract was formed and if so, the respective rights and obligations of the parties.

These decisions are significant as they also impact on contract negotiations in Kenya via email and the resultant risk of unknowingly accepting binding obligations resulting in a binding contract. The following decided cases illustrate judicial interpretation of contracts concluded by email: a. In <<Nicholas Prestige Homes v. Neal [2010] EWCA Civ 1552>>, the U. K Court of Appeal held that a binding contract was created as a result of a chain of emails, where in response to a Property Agency attaching an agency agreement, the property owner replied “that’s fine”.

The property agency successfully claimed damages for breach of contract when the property owner subsequently sold the property through a different agency. b. In <<Golden Ocean Group Limited v. Salgaocar Mining Industries PVT & Ano. , (2011) EWHC 56 (Comm)>>, the U. K. High Court held that a series of emails, could arguably create a binding guarantee. The case involved an agreement and guarantee for the chartering of a vessel over a period of ten (10) years. When the charterers refused to take delivery of the vessel, they were sued on the foot of the guarantee.

While no final version of the agreement or guarantee were ever signed, the High Court held that it was arguable that not only did the chain of emails between the parties create a sufficiently certain guarantee but that the emails and the electronically printed signature of the person sending them satisfied the Statute of Frauds 1677 (which requires that certain agreements must be in writing and signed). The court was able to look back through the earlier emails to discern the terms of the Agreement. Clarke J. held at paragraph 63 that: “63.

As to good commercial sense, it seems to me highly desirable that the law should give effect to agreements made by a series of email communications, which follow, more clearly than many negotiations between men of business, the sequence of offer, counter offer and final acceptance by which, classically, the law determines whether a contract has been made. This is particularly so when charter parties with guarantees are often negotiated and concluded by the sort of email exchange seen in this case; and are not necessarily followed by a drawn-up charter”.

Given the above, it is paramount that parties should carefully monitor email correspondence and documentation passing via email during pre-contractual negotiations. The importance of this cannot be emphasized enough. Extra care must also be taken when replying to an email as part of a chain, clarifying what parts of the preceding email are being replied to. Task 3 Mrs. Turner's nursery has now opened and has recruited well. She is concerned as to the different types of liabilities, which she may be affected by during the course of her business and would appreciate it if you could write to her regarding this.

Explain the different types of liabilities and along with examples. Answer A liability is a debt assumed by a business entity as a result of its borrowing activities or other fiscal obligations (such as funding pension plans for its employees). Liabilities are paid off under either short-term or long-term arrangements. The amount of time allotted to pay off the liability is typically determined by the size of the debt; large amounts of money usually are borrowed under long-term plans. Payment of a liability generally involves payment of the total sum of the amount borrowed.

In addition, the business entity that provides the money to the borrowing institution typically charges interest, figured as a percentage of the amount that has been lent. A company's liabilities are critical factors in understanding its status in any industry in which it is involved. As John Brozovsky noted in Journal of Commercial Lending, "a basic understanding of accounting for liabilities is necessary to assess the viability of any company. Companies are required to follow certain accounting rules; however, the rules allow onsiderable flexibility in how a company accounts for liabilities. " There are 3 main liability categories – current liabilities, long-term liabilities and contingent liabilities. 1. Current Liabilities Current liabilities are short-term financial obligations that are paid off within one year or one current operating cycle, whichever is longer. A normal operating cycle, while it varies from industry to industry, is the time from a company's initial investment in inventory to the time of collection of cash from sales of that inventory or of products created from that inventory.

Typical current liabilities include such accrued expenses as wages, taxes, and interest payments not yet paid; accounts payable; short-term notes; cash dividends; and revenues collected in advance of actual delivery of goods or services. Economists, creditors, investors, and other members of the financial community all regard a business entity's current liabilities as an important indicator of its overall fiscal health. One financial indicator associated with liabilities that is often studied is known as working capital.

Working capital refers to the dollar difference between a business's total current liabilities and its total current assets. Another financial barometer that examines a business's current liabilities is known as the current ratio. Creditors and others compute the current ratio by dividing total current assets by total current liabilities, which provides the company's ratio of assets to liabilities. For example, a company with $1. 5 million in current assets and $500,000 in current liabilities would have a three-to one ratio of assets to liabilities. 2.

Long-term Liabilities Liabilities that are not paid off within a year, or within a business's operating cycle, are known as long-term or noncurrent liabilities. Such liabilities often involve large sums of money necessary to undertake opening of a business, major expansion of a business, replace assets, or make a purchase of significant assets. Such debt typically requires a longer period of time to pay off. Examples of long-term liabilities include notes, mortgages, lease obligations, deferred income taxes payable, and pensions and other post-retirement benefits.

When debt that has been classified as long-term is paid off within the next year, the amount of that paid-off liability should be reported by the company as a current liability in order to reflect the expected drain on current assets. An exception to this rule, however, comes into effect if a company decides to pay off the liability through the transfer of noncurrent assets that have been previously accumulated for that very purpose. 3. Contingent Liabilities A third kind of liability accrued by companies is known as a contingent liability.

The term refers to instances in which a company reports that there is a possible liability for an event, transaction, or incident that has already taken place; the company, however, does not yet know whether a financial drain on its resources will result. It also is often uncertain of the size of the financial obligation or the exact time that the obligation might have to be paid. Contingent liabilities often come into play when a lawsuit or other legal measure has been taken against a company. An as yet unresolved lawsuit concerning a business's products or service, for example, would qualify as a contingent liability.

Environmental cleanup and/or protection responsibility sometimes falls under this classification as well, if the monetary impact of new regulations or penalties on a company is uncertain. Companies are legally bound to report contingent liabilities. They are typically recorded in notes that are attached to a company's financial statement rather than as an actual part of the financial statement. If a loss due to a contingent liability is seen as probable, however, it should be included as part of the company's financial statement.

References

1. Answers. 2012, Dec 24). Retrieved from Gale Encylopedia of Small Business: Liabilities: http://www. answers. com/topic/liabilities-2#ixzz2FvSlFuj9
2. Brozovsky,John. (March 1994). A Review of Changes Affecting Accounting for Liabilities. Journal of Commercial Lending. Contractual Agreement - offer and acceptance. (2012, Dec 25). Retrieved from e-lawresources. co. uk: http://e-lawresources. co. uk/Offer-and-acceptance-contract. php
3. Four Essential Elements of a Contract. (2012, Dec 18). Retrieved from Small Business Development Corporation: http://www. smallbusiness. wa. ov. au/four-essential-elements-of-a-contract/ Harkness Henry ; Co. (2012, Dec 30).
4. Forming Contracts Electronically. Retrieved from FindLaw - Practical legal articles from FinLaw New Zealand: http://www. findlaw. com/12international/countries/nz/articles/872. html Iseme, Kamau ; Maema Advocates. (2013, Dec 30).
5. Formation of Contracts by Email. Retrieved from Iseme, Kamau ; Maema Advocates: http://ikm. co. ke/node/66 Lee Mei Pheng; Ivan Jeron Detta. (2009). Business Law. Oxford University Press. Marry Charman. (2007). Contract Law, 4th Edition.
6. William Publishing. PainSmith. (2012, Dec 24). Understanding "Subject to Contract". Retrieved from PainSmith Landlard and Tenant Blog: http://blog. painsmith. co. uk/2010/08/03/understanding-subject-to-contract/ Sharon Christensen. (2012).
7. Formation of Contracts by Email - Is it Just the Same as the Post? Law and Justice Journal. Wiliams, Georgina; Thomas J. Phillips, Jr. (February 1994). Cleaning Up Our Act: Accounting for Environmental Liabilities. Management Accounting. Winicur, Barbara. (January 1993). Long Term Liabilities. National Public Accountant.

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