First Recruit Bradford (FR) and Deluxe Office Design (DOD).
An Example of Offer and Acceptance Analysis in Contract Law.
This case involves an interruption in a contract negotiation due to a communications delay. The communications delay was due to equipment failure at DOD and a problem with a third party (the postal service). During this communications delay, FR made the incorrect assumption that DOD had been slow in continuing negotiations and made the contract with another supplier who had made a lower bid than DOD.
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This new contract excluding DOD was formed while DOD assumed the negotiations were essentially over between DOD and FR and that the terms of the contract had been set and agreed upon. What is the legal position FR holds with regard to DOD? An important issue may be that DOD requested that FR confirm the final agreement by post. However, FR had requested that the payment to DOD be made in stages rather than a lump sum.
Although FR was unaware of what the response of DOD would be to this request, DOD had in fact agreed to this ‘consideration’. Because of the delay in the post from DOD, the negotiations were broken off (by FR) before FR received confirmation that the requested ‘consideration’ would be met. Thus, there was never a post from FR to DOD confirming to DOD that all conditions of the contract were met. This seems to be a condition, set by DOD, that would signal that all parties to the contract were of the same mind.
The aspect of contract law which appears to apply in the instance described above is ‘Offer and Acceptance’. The offer is considered to be the indication by one party to the other party of their acceptance of terms without the need for further negotiations. According to this principle, the contract only becomes binding when the offerer of the contract has communicated that the terms of the contract are accepted.
That is, the offer and acceptance principle says that the contract becomes binding when the two parties are of the same mind. According to Acme Grain v. Wenaus, "... to constitute a contract, there must be an offer by one person to another and an acceptance of that offer by the person to whom it is made. A mere statement of a person's intention, or a declaration of his willingness to enter into negotiations is not an offer and cannot be accepted so as to form a valid contract".
So how does the offer and acceptance principle apply in the instance of interaction between FR and DOD?
It appears that DOD made an offer to accept the terms set forth by FR of a staged payment and was then waiting for the confirmation by post from FR. From the point of view of DOD, the negotiations were finished and the agreement to the contract was implied by the previous communication with FR. From the point of view of FR, an offer had been made to DOD that the contract would be accepted if staged payments could be allowed. From the FR point of view, no such acceptance of the offer had been made, it was unknown if DOD were of the same mind as FR and thus there was no binding contract in effect when FR made a separate contract with another supplier.
The legal position of DOD will likely be based on the precedent set by Household Fire & Carriage Accident Insurance Co. v. Grant (1879) in which the decision stated the "post office (is) the agent of both parties. If the post office be such common agent, then it seems to me to follow that, as soon as the letter of acceptance is delivered to the post office, the contract is made complete and final and absolutely binding as if the acceptor had put his letter into the hands of a messenger sent by the offerer himself as his agent to deliver the offer and receive the acceptance." DOD will likely argue that this decision says that the contract should not have been lost because of a problem with the post office. In addition, DOD will argue that FR and DOD were of the same mind on the terms of the contract because DOD had agreed to the staged payment terms of FR and thus the contract is binding.
However, FR also has a legal avenue to pursue. DOD stipulated that final acceptance of the contract should be stipulated by letter from FR. FR never sent this letter because it was unaware that DOD had accepted the additional terms of staged payment. In the case of Holwell Securities v. Hughes (1974), a similar situation is considered. This case decided that “The postal rule does not apply if (1) the express terms of the offer specify that the acceptance must reach the offeror and (2) … the negotiating parties cannot have intended that there should be a binding agreement until the party accepting an offer ... had in fact communicated the acceptance or exercise to the other." FR can argue that the terms of the negotiations, as set forth by DOD, specified that the contract was not binding until DOD was notified by FR via post that all terms were acceptable.
It is proposed that this argument puts FR in a stronger legal position than DOD. As such, FR should be able to continue the current contract with the lower bidder and should also be able to avoid the payment of any damages to DOD.
Invalidation of contracts based on false statements and remedies for the ‘innocent party’.
If one of the parties in a contract perpetuates a fraud to entice an ‘innocent party’ to enter into the contract, then there may be recourse for the innocent party to void the contract. The court may consider a contract invalid if the ‘innocent party’ entered into the contract because the offerer made false statements. The definition of a false statement, for legal purposes, must meet certain criteria.
Fridman has discussed that four conditions must occur before the court can consider statements of the offerer to be fraudulent. "
- that the representations complained of were made by the wrongdoer to the victim (before the contract);
- that these representations were false in fact;
- that the wrongdoer, when he made them, either knew that they were false or made them recklessly without knowing whether they were false or true; and
- that the victim was thereby induced to enter into the contract in question (a legal presumption exists in this regard)." (Fridman, G).
These conditions specify that a party to the contract becomes the ‘wrongdoer’ when there is intent on committing fraud in order to entice an ‘innocent party’ into the contract. Some examples of case law on misrepresentation are Redgrave v. Hurd (1881) and Redican v. Nesbitt (1924). In Redgrave v Hurd, the seller exaggerated claims on the value of a law practice. The buyer of the practice found the practice to be “utterly worthless”.
The court ruled that the contract as invalid because of misrepresentation, saying "If a man is induced to enter into a contract by a false representation it is not sufficient answer for him to say, "If you had used due diligence you would have found out that the statement was untrue. You had the means ... of discovering its falsity, and did not choose to avail yourselves of them."". Thus, false statements can invalidate the contract if the statements about the value of the contract are exaggerated beyond what would be considered a reasonable advertisement. This is true even if the ‘innocent party’ has the means to determine that the value has been misrepresented.
On the other hand, the court must decide if the misrepresentation is meant to deceive. In Redican v. Nesbitt a house was bought without inspection. When the buyer saw the house for the first time, the buyer thought that the seller had misrepresented the condition of the house. The court ruled against the buyer, saying "Innocent misrepresentation (i.e non-fraudulent but such as renders the subject of sale different in substance from what was contracted for), such as will support a demand for rescission in equity ... will serve as a good equitable defence to a claim for payment under contract as well as afford ground for a counter-claim for rescission."
Courts can evidently decide that misrepresentations are ‘innocent’ if the representation is not too far from the truth, or that the misrepresentations were ‘innocent and not meant to deceive. The court may also decide that what turns out to be a misrepresentation after the contract has been executed was merely an unjustified opinion of the offerer and not a purposeful misrepresentation. Further, the court may also decide that incorrect predictions of future occurrences by the offerer are not purposeful misrepresentations even though they may turn out to be false.
When a contract is considered void because of misrepresentation or because of nonperformance of one party within the contract, then the innocent party may approach the court to legally void the contract and provide a financial remedy for the situation. The remedies available to the ‘innocent party’ depend on the damages suffered by the party. If the court decides that fraudulent misrepresentation has occurred, then the court can decide rescind the contract so that the parties are in a situation such that the contract never existed.
The court may further allow the ‘innocent party’ to collect an indemnity from the ‘guilty party. These funds would cover the costs created by the innocent party attempting to carry out the contract and would be paid by the guilty party. An example of an indemnity judgment is found in Whittington v Seale-Hayne “The plaintiffs bred poultry and were induced to enter into a lease of property belonging to the defendants by an oral representation that the premises were in a sanitary condition. In fact the water supply was poisoned and the manager fell ill and the stock died. The terms of the lease required the plaintiffs to pay rent to the defendants and rates to the local authority and they were also obliged to make certain repairs ordered by the local council.
Farwell J rescinded the lease, and, following the judgment of Bowen LJ in Newbigging v Adam held that the plaintiffs could recover the rents, rates and repairs under the covenants in the lease but nothing more. They could not recover removal expenses and consequential loss (ie, loss of profits, value of lost stock and medical expenses) as these did not arise from obligations imposed by the lease (the contract did not require the farm to be used as a poultry farm).
Had they been awarded, they would have amounted to an award of damages (ie, expenses resulting from the running of the poultry farm).” (Asif, T, n. d.). Damages beyond that paid for by the indemnity may also be determined by the court. These damages paid by the guilty party are supposed to restore the innocent party to the financial position held prior to the execution of the fraudulent contract.
An example of damages is found in Royscott Trust Ltd v Rogerson. “A car dealer induced a finance company to enter into a hire-purchase agreement by mistakenly misrepresenting the amount of the deposit paid by the customer, who later defaulted and sold the car to a third party. The finance company sued the car dealer for innocent misrepresentation and claimed damages under s2(1).
The Court of Appeal held that the dealer was liable to the finance company under s2(1) for the balance due under the agreement plus interest on the ground that the plain words of the subsection required the court to apply the deceit rule. Under this rule the dealer was liable for all the losses suffered by the finance company even if those losses were unforeseeable, provided that they were not otherwise too remote. It was in any event a foreseeable event that a customer buying a car on HP might dishonestly sell the car.”
An illustration of the way the court limits damages in contract disputes is found in the very interesting case of British Westinghouse v Underground Electric Railway of London. Tufal describes this case as follows “The defendant agreed to supply the plaintiff with turbines of stated efficiency, but supplied less efficient ones, which used more coal. The defendant accepted them and used them for some years before replacing them with turbines which were even more efficient than those specified in the contract with the defendant. After replacement, the plaintiff claimed damages from the defendant.
The plaintiff was held to be under no duty to mitigate by buying new turbines, but since he had done so, the financial advantages he had gained from new turbines had to be taken into account. Thus, as the plaintiff's saving in coal exceeded the cost of the new turbines, he was not entitled to damages. However, if the plaintiff had claimed damages before buying the new turbines, the defendant would have had no defence.” . In this case, the innocent party accepted a remediation from the wrongdoer and then tried to sue the wrongdoer for damages. However, the ruling was that the damages had already been mitigated by the wrongdoer. This would seem to suggest that, at least in this case, the court will not make the innocent party ‘more than whole’ and will attempt to avoid unjust enrichment.
- Acme Grain v. Wenaus as cited in author unknown, n. d., http://www.duhaime.org/contract/ca-con4.aspx
- Fridman, G., The Law of Contracts in Canada, p. 295 (1994) as cited in Author unknown, n.d., http://www.duhaime.org/contract/ca-con5.aspx#misrepresentation
- Holwell Securities v. Hughes (1974). as cited in Author unknown, n.d., http://www.duhaime.org/contract/ca-con4.aspx#offer
- Household Fire & Carriage Accident Insurance Co. v. Grant (1879) as cited in Author unknown, n.d., http://www.duhaime.org/contract/ca-con4.aspx#offer
- Redgrave v. Hurd (1881) as cited in Author unknown, n.d., http://www.duhaime.org/contract/ca-con5.aspx#misrepresentation
- Redican v. Nesbitt (1924). ) as cited in Author unknown, n.d., http://www.duhaime.org/contract/ca-con5.aspx#misrepresentation
- Tufal, A. , n. n d.,http://www.lawteacher.net/Contract/Discharge%20and%20Remedies/Remedies%20Cases%201.htm
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