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Contract Law

Contract Law

 

  

Introduction

Honouring promises between parties constitutes a key component of contract law. A promise is a communication by one party of its intention to assume or undertake any obligation to another party[1]. Since contracts induce reasonable expectations[2], there is a need to enforce these. In essence, contract law demands that the promisor either undertake the promise or pay the promise the equivalent monetary value of the expected performance, as compensation. In this way, contract law seeks to guard the promisee’s reasonable expectation regarding the performance of what the promisor is obligated to do. It is important to enforce promises since “respect for others as free and rational requires taking seriously their capacity to determine their own values.”[3]. In the event that promisors are allowed to go back on their promises without taking any responsibility, it is likely that their preference to appeal to the social rule of promising could fail to attract the seriousness that it deserves. The focus of this essay is on establishing whether BIQ, based on the facts provided, should be held accountable for not honouring its promise for extra payments to two separate contracts it had entered with S Ltd.

Facts

  • In January 2016, BIQ and S Ltd entered into a contract worth £86,000, whereby S Ltd would offer wiring services for BIQ’s client (Northwest Bank). The contract between BIQ and S Ltd required the latter to have completed work by 6 June 2016.
  • The contract between BIQ and Nortwest Bank stipulated that any delays in completion of the work would result in BIQ incurring an additional £50,000 per week in fines, after the 22 September deadline.
  • To avoid incurring this fine, BIQ promised to pay S Ltd an additional £30,000 when it became clear that the work would not be completed on time. Subsequently, S Ltd completed the work as par the agreed timeline.
  • On 7 May 2016, BIQ and S Ltd entered into a second contract in which S Ltd would install wiring to a private client of BIQ (‘Firtree’) at a cost of £35,000. BIQ was expected to have completed the work by 4 August 2016. However, this contract did not include a clause for a penalty in case of late completion
  • In July, BIQ realised that S Ltd may not complete the work on schedule and hence promise an additional   £15,000 to facilitate in timely completion of the work. BIQ later established that following its promised to pay additional compensation to facilitate S Ltd’s completion of its work at Northwest Bank, S Ltd pulled out all its workers under the ‘Firtree’ project and reassigned them to another different contract. This made it hard for S Ltd to complete the May Contract on time.
  • BIQ feels that S Ltd behaved in a dishonest manner and hence has declined to honour either of the two promises for additional compensation to S Ltd. 

Legal Issues

In agreeing to pay S Ltd an additional £30,000 after it became clear that the work would not be completed in time, BIQ was in effect trying to avoid the possibility of incurring an additional £50,000 to Northwest Bank in fines for every week after the 22 September deadline that the work was not completed. Additionally, it is also a sign that BIQ was committed to meeting its end of the bargain in its contract with Northwest Bank. BIQ had a reason to doubt whether S Ltd would deliver the work on schedule seeing as the deadline of their contract is fast approaching.

By promising to pay more to have the work delivered on schedule, BIQ averts a disbenefit that could ensure should; it fail; to honour its promise to Northwest Bank. Since BIQ promised S Ltd an additional £30,000 to have the work completed on time, this promise while not in writing, is binding. After agreeing to pay extra £15,000 for the timely completion of the ‘Firtree’ contract BIQ learns that S Ltd could be liable for blame for having pulled out all its workers from this project and reasoned them to another project, thereby jeopardising the completion of the January project. 

Law relevant to the legal issue

The key legal issues emerge under this case: duress, consideration, and pre-existing legal duty. Duress in contract law seeks to establish if an individual was coerced to enter into an agreement with another party. Previously, common law only acknowledged physical duress where an individual was compelled to enter into a contract after being subjected to unlawful physical violence[4]. However, in recent years, economic duress has emerged as a valid claim as well. Contract law identifies duress as a vitiating factor since there is no free consent. In case undue influence or duress is identified as having been applied to compel an individual to enter into a contract, then such a contract is deemed voidable[5]. Consequently, the aggrieved party could sue for damages. In the contract between BIQ and S Ltd, there is no evidence that physical duress has been applied to compel either party to enter into the contract. An economic duress may also not be deemed to have happened because neither of the parties protested on grounds of being corrected; and nor did they take the necessary precautions to overcome it.

            On the issue of consideration, the promisor (BIQ) promises to make extra payments to the promise (S Ltd) in order that the promisee can complete the work on time. Consideration therefore, entails each of the parties to a promise suffering a detriment and receiving a benefit. The promise between BIQ and S Ltd meets the requirements of consideration and is hence enforceable under law. First, the consideration is sufficient; has been initiated by the promisee (BIQ), and is not past; 

            The existing duty rule is also applicable to this case.  It holds that a pre-existing duty ought not to be considered for changes in the contract[6].  In other words, once the promisee is undertaking a legal duty in defined by the contract, such performance cannot be used as grounds for variation in the contract. The promisee cannot therefore demand additional payment for a contract that they have already agreed to undertake. The only time when a contract can be changed is in case of new consideration. 

Law

On the basis of duties owned under a contract, consideration could happen in case it was due to an existing duty that allowed another party to prevent disbenefit or benefit. In Williams v Roffey[7], Roffey had won a contract to by Shepherds Bush Housing to renovate a block of flats. Roffey sub-contracted carpentry work to Williams at a cost of £ 20,000. He would receive it in instalments. Williams however was facing financial difficulties and it became apparent to Roffey that the work would not be completed in time. Since the contract between Roffey and Shepherds Bush Housing had a clause that they would be penalised for late completion, he thus agreed to pay Williams an extra payment to facilitate in timely completion of the work. Williams managed to complete the work on more flats but Roffey did not pay all the extra payment as promised. He ceased working on the project and sued for damages. 

Roffey was forced to contract new carpenters to complete the remaining work. In its ruling on the case, the Court of Appeal held that where one party enters into a contract with a second party and later promises to make addition payment as a means of facilitating the other party execute his duties under the existing contract, the agreement is deemed to be binding in case the party that promises to pay additional money has hence gained avoided a disbenefit or realised some new practical benefits. With regards to Williams v Roffey[8], Roffey acquired benefits that included: (i) ensuring that Williams resumed his work; (ii) avoided activating the penalty clause contained in the contract with the main contractor, in the event that work was not completed on time; and (iii) Avoiding the trouble and expense of having to look for someone else. As such, Williams was entitled to the additional payment.

In the event that a party is bound by an existing contractual duty to perform an act, such an act may not be useful as consideration for a new agreement. For example, in Stilk v Myrick[9], the claimant worked as a crew member of a ship that transited between London and the Baltic. He received a monthly wage of £5. During the voyage, 2 members of the crew left the ship, and the Captain was short-handed. He asked the remaining crew members to ensure the ship made it back to London undermanned and promised that they would share the wages of their two colleagues who had disserted the ship. The claimant agreed and they manned it back to London undermanned. However, the Captain reneged on his promise. In its ruling, the court held that the claimant was bound by an existing contractual obligation to man the ship back to London and had therefore undertaken to withstand all the emergencies involved. As such, he had failed to provide any consideration for the promise for additional compensation. As such, the claimant was not entitled to anything.

Under certain situations, doing something beyond that which has been stipulated under contract or law of the land could be held as grounds for consideration. For example, in Glasbrook v Glamorgan[10], Glasbrook, out of fear that violence would erupt in the mines following a conflict between protesters and minors, sought to enlist the services of the police. After Glabrook had been presented with a bill for the services of the police in quelling the violence, Glasbrook declined to pay. He maintained that the police had a duty to ensure peace and as such, the services they had rendered was part of their duty. However, the Court order Glasbrook to pay for the services since Glasbrook has sought the services of the police. The court, in this case, viewed the services rendered by the police as 'special', as opposed to part of the normal police duties.

In Harty v Ponsby[11], the Captain of a voyage suffered a huge blow when half of the crew deserted him. Faced With the risk of having to operate the voyage with only a handful of the crew, the captain agreed to pay the remaining crew members addition money over and above their normal wages should they succeeded in completing the voyage. However, the Captain declined to pay the extra wages as promised.  The aggrieved crew sued. In making its ruling on the case, the court was faced with the issue of whether the promise by the captain to pay the remaining crew additional money on top of their normal wages constituted a consideration of having to sail the ship back. The court held this claim by noting that since the ship did not have sufficient crew members, the ensuing journey was dangerous. As such, the performance of the remaining crew went beyond their existing duties.  Also, the fact that there was a change in crew members forced the Captain to negotiate a new contract with the remaining crew, thereby abandoning the old contract.  

Applying the law to the case

In order that a contract agreed upon in Common Law jurisdictions to be put in force, two things are mandatory: (i) such a promise ought to be contained in a deed; and (ii) the promise ought to be supported by consideration[12]. Consideration as defined by Lord Dunedin defined consideration as ‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable,’[13]. In the spirit of the notion of consideration the Common Law demands for a “mutual exchange”[14] in order that a contract may be formed. When BIQ agrees to give S Ltd additional payment so that work could be completed on time, there was a “mutual exchange” between the two parties and the promise for additional payment was equally supported by a consideration.

The doctrine of equitable estoppels has also found application on contract law in establishing a claim, especially in the event that the promisor reneges on his promise to pay the promisee[15]. This particular doctrine could apply to the case under review as it meets some of the requirements that need to be established in the equitable estoppels doctrine. First, BIQ made S Ltd an unequivocal and clear objective. Secondly, S Ltd was bound to suffer detriment in the event that BIQ does not honour his promise. In the event that BIQ reneges on his promise, this is also likely to be an unconscionable act.

Conclusion

Based on the facts of the case, BIQ had entered into two separate contracts with S Ltd. On two separate occasions, BIQ agreed to increase the compensation to the fee agreed with S Ltd so that the work could be completed on time as the deadlines were approaching and a lot had to be done.   Since the two parties had functional contracts prior to this new agreement, we can therefore assume that the new promises to pay an additional fee to have the work completed on time overrides the old contracts. Based on the doctrine of equitable estoppels, failing to honour the promise would be an unconscionable act that would cause detriment to S Ltd if BIQ reneges on the promise.   

  

Bibliography

Books

Fried C, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press, Cambridge, 1981)16

McKendrick E, Contract Law (Palgrave Macmillan, London, 2015) 38

Poole J, Textbook on Contract Law (Oxford University Press, Oxford, 2016) 7

Smith S, Contract Theory (Oxford University Press, New York, 2004) 57

Cases

Cook Islands Shipping Co Ltd v Colson Builders [1975] 1 NZLR 422 at 434-435

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd

Glasbrook Brothers v Glamorgan County Council (1925) ac 270.

Gulf Corporation Ltd v Gulf Harbour Investments Ltd [2006] 1 NZLR 21

Hartley v Ponsonby [1857] 7 EB 872

Stilk v Myrick [1809] EWHC KB J58 King's Bench Division

Williams v Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All ER 512


[1] Stephen A Smith, Contract Theory (Oxford University Press, New York, 2004) 57 

[2] Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press, Cambridge, 1981)16 

[3] Ewan McKendrick, Contract Law (Palgrave Macmillan, London, 2015) 38 

[4] Ewan McKendrick, Contract Law (Palgrave Macmillan, London, 2015) 38

 [5] Ibid

[6] Ewan McKendrick, Contract Law (Palgrave Macmillan, London, 2015) 38

 [7] Williams v Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All ER 512

[8] Williams v Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All ER 512 

[9] Stilk v Myrick [1809] EWHC KB J58 King's Bench Division 

[10] Glasbrook Brothers v Glamorgan County Council (1925) ac 270. 

[11] Hartley v Ponsonby [1857] 7 EB 872 

[12] Gulf Corporation Ltd v Gulf Harbour Investments Ltd [2006] 1 NZLR 21

[13] Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd 

[14] Cook Islands Shipping Co Ltd v Colson Builders [1975] 1 NZLR 422 at 434-435 

[15] Jill Poole, Textbook on Contract Law (Oxford University Press, Oxford, 2016) 7 

 

 

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