Problem Solving Advice to Client

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Table of Contents

Case Brief
Mr A Claims to an Enforceable Contract with Mr B.
The Key Issues in Relation to Such a Contract
Can Mr A argue that he has an enforceable contract with Mr C
Relevance of the Board meeting that Mr A failed to attend
Actions Mr A should take
The Doctrine of Privity of contract
References
List of Cases

Case Brief

Provide a piece of advice to Mr A who believes that he had concluded a contract with Mr B to purchase a one-third interest in D Pty Limited (which is owned 1/3 by each of Mr A, Mr B and Mr C) from Mr B. Mr B has told Mr A that he has sold his 1/3 interest to Mr C. However, Mr A tells you that he believes an agreement between Mr A and Mr B to purchase the interest had already been reached as a result of three emails exchanged with Mr B. In the first email, Mr A sent Mr B a draft agreement (an attachment) prepared by a lawyer on a ‘without prejudice’ basis.

In the second email, Mr B emailed Mr A back indicating that the “provisional agreement” received “looked ok” subject to clarification of a term in the document namely the valuation of part of an asset owned by D Pty Limited and he asks Mr A to clarify that term.

In the third email, Mr A responded fully to Mr B’s query answering the request for information fully. Mr B did not respond to this email, but Mr C tells a third party that he understands that Mr A and Mr B “have a deal” and Mr A hears this from the third party. Mr A is subsequently told by Mr B that he, Mr B, has sold his 1/3 interest to Mr C. Mr C then approaches Mr A and offers to sell the two 1/3 interests to Mr A for a nominated price. Mr A responds to Mr C that he is already entitled to the 1/3 that was held by Mr B. Mr C responds that at a Board Meeting of D Pty Limited, to which Mr A was invited but did not attend (and which took place before the email correspondence), it was resolved that Mr B should sell his interest in D Pty Limited to Mr C who was authorised by the Board to offer to sell both interests to Mr A. Mr A then purports to accept Mr C’s offer but Mr C states that Mr A has rejected the offer (through his response that he is ‘already entitled to it’) and that the offer is therefore no longer open and Mr C intends to purchase the interest from Mr B in his own right.

Mr A Claims to an Enforceable Contract with Mr B.

A contract is defined as an agreement that leads to obligations of the parties to the agreement, such obligations are recognized by law It is a desire to be bound by the terms of an agreement once an offer has been made and the acceptance to the terms of the offer are communicated (Richards, 2007, 3).

In the case of Mr A no contract was concluded between him and Mr B as there was no consideration. Communication through emails amounts to instantaneous communication the rule of communicating offer and acceptance through mail apply. To address all the above issues, it is important to verify whether or not the contract fulfilled the essentials of a contract.

The most important as well as essential elements of a contract include:

Offer

An offer is a manifestation of one’s willingness to enter into a predetermined bargain proposed in exchange for consideration (Richard, 2007, 4). In order to amount to an offer, it must be shown that the person making the offer had the intention to be bound by such a proposal (McKendrick 2000, 26-42). This was established in the case of Harvey v Facey UKPC1, Carlill v Carbollic Smoke Ball Company 1 QB 256. The first email by A to B amounts to an offer as one party conveyed the message with the intention that he would be bound by it. A also made an effort to communicate this information to the other party, B, satisfying the requirement that an offer has to be communicated.

An offer has to be communicated as was stated in the case of Taylor v Laird (1856)1H &N 266 (McKenderick, 2000, 31-42). In the case, it was held that a telegraph inquiring about the lowest price for goods was just a response to a request of information. Only the final telegraph between the parties was the contract’s offer and acceptance (Legal Norms 1981, 2).

An offer must be separated from an invitation to treat (Poole, 2001.24-39). An invitation to treat is merely showing a willingness to engage in negotiations whereas an offer amounts to a willingness to enter legally binding obligations (Furmstone, 2001, 27). This was illustrated in Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Limited (1952) 2All ER 456. The second email from Mr B to Mr A was an email requesting for further information was a mere invitation to treat. Mr B showed a willingness to engage in the negotiations.

The rule without prejudice allows parties to a contract to communicate with the aim of genuinely resolving any misunderstanding in the future and such communication should be confidential. This is a measure to ensure that any communication between parties to a contract is not referred to in any court proceedings in case a dispute erupts. The without prejudice rule is justified for two reasons, one, it aims to allow the parties to a contract to transact business with confidentiality. The parties can make offers without the fear of the public prying into the transaction. This allows parties to resolve disputes without engaging the courts.

The second reason is that, if the parties to a contract agree that the rule should apply, either agree expressly or impliedly, it is said that a contract arises. Once a contract is formed the parties are prohibited from disclosing any information about the contract to a third party. This was established in the case of Barneston v Framlington Group Ltd & Another ECWA civ 502. The email sent by Mr A to Mr B marked without prejudice allows the statement made by Mr A cannot be used against him in any other future business deals or even in court proceedings.

Acceptance

Acceptance is defined as the final expression of agreeing to all the set terms of the offer. Acceptance has to be communicated to the other party to make the acceptance valid. The communication can either be in writing, oral or is inferred by a party’s conduct (Furmstone, 2001, 52-61, Boale, 2001, 48-60). Mr B failed to communicate his acceptance or rejection of Mr A’s offer. The second email was a mere request for further information. Silence, therefore, does not amount to acceptance, acceptance must be communicated.

The mode of communicating the acceptance is very important to validate the contract (McKendrick, 2000, 42-51). In the case of Tinn v Hoffman & Co. (1873), 29LT 271 the terms set were that a fast method of communication should be used to communicate the acceptance.

The postal rule was established in the case of Adams v Lindsell (1818) 1B & Ald 681 states that an offer is only deemed as accepted as soon as the letter of acceptance is posted (McKendrick, 2000, 47-51). It be noted that in some instances courts have in the past refused to extend the postal rule to acceptance by telex (Poole, 2001, 49-54. In Entores v Miles Far East Corp (1955) it was held that instantaneous communication was not subject to the rule. In such cases, acceptance can only occur once the telex is read. In the case of Brinkibin v Stahag Stahl (1982) where it was held that the contract is only formed once the communication is received. In the case of Entorres it was stated that instantaneous means of communication are as good as being in each other’s presence. The argument was developed further in other cases. Modern day means of communication can therefore be said to be instant in nature such as emails.

In today’s modern world and with the constant application of technology to communication there is sufficient reason for one to believe that the postal rule applies by extension to emails as in the case above between Mr A and Mr B. Emails as a means of communication, acceptance is incomplete until it is received by the offeror. Although an email message is as instant as a telegraph or telex it does not signal its arrival on the other end like a telex does. There is the issue of the legal requirement that a contract has to be in writing and sealed with the parties’ signature. Under common law, it is provided in statute that a contract is deemed completed without the party’s signature or the contract in writing but in practice all contracts have to be in writing and signed. Mr B sends a second email requesting for more information does not amount to acceptance yet but an invitation to treat. The second email stating the provisional contract looks ok and requests for valuation of the assets. This proves a willingness of the party to enter a binding contract with Mr A. There is no specific statute regulating e-commerce at the moment. The fundamentals of contract law still apply to e-commerce. Mr A has no enforceable contract with Mr B therefore he is not entitled to his interest in the company.

Acceptance can only be by the party the offer has been intended for. The offeree cannot be liable if an unauthorized person accepts the offer on his behalf. A third party cannot therefore communicate the acceptance without permission to do so. Therefore, in the above case the only person who can accept the offer by Mr A is Mr B. Mr C as a third party was not authorized to do so and any communication by him would not amount to an offer.

Legal purpose

The purpose of getting into a contract must be for legal reasons. A contract entered for illegal reasons or an act that is illegal is invalid.

Mutual obligations

Also referred to as ‘meeting of the minds’. To have mutual obligations refers to the parties to the contract common understanding and as well as agree to the terms of the agreement. The parties to the agreement have to agree to the very same terms, at the same time (Restatement of contracts, 1981, 24).

To determine the meeting of minds essentials elements to a contract are analysed objectively. This was the holding in Capeland v Alsobrook (1999) SW 598. Intention that fails to be expressed is irrelevant in determining whether there was an agreement to the terms of the contract. Courts only examine the communication between the parties and the circumstances surrounding the communication. Both the offer and acceptance must be clear as well as concise.

Where the meeting of minds of the parties is in question, the question of fact to be clarified is the establishing of the fact that a valid contract is in place. Once it is established that one party to the contract drew was made to believe otherwise from the other’s party’s conduct, then such an act has the full backing of law (Beatson, 2002, 289).

Certainty of the Subject Matter

A contract is said to be legally binding only if the terms are sufficiently defined and determined to enable the court of law to understand the parties’ obligations under it. Therefore, the material terms set in the contract have to be agreed upon before they can be enforced. The second email from Mr A to Mr B contained all the answers to Mr B’s questions pertaining to the valuation of the subject matter, therefore, Mr A had verified the subject matter of what the contract subject matter would.

Consideration

Consideration is the exchange of a bargain in return for a future promise. It consists of either a benefit to the promises or a detriment to the promise (Treitel, 1999, 123). It may be a right, a profit or interest and in case of a forbearance a loss is incurred.

Competent parties

Parties to a contract must be competent and authorized by law to enter into such contracts. Persons of sound mind and of age (Smith, 200, 123).

The Key Issues in Relation to Such a Contract

The mode of communicating the acceptance is very important to validate the contract (McKendrick, 2000, 42-51). Unless the offeror specifies how acceptance should be conveyed as in Tinn v Hoffman & Co. (1873) 29LT 271. Mr B failed to communicate his acceptance effectively to Mr A In case of a lapse of an offer it would amount to a revocation of the offer (Furmstone, 2001, 67-69).

Mr B mode of acceptance was not as clear and as concise as the offer was. Acceptance was by implied conduct. Mr B acted in a manner suggesting that he had accepted Mr B’s offer to buy his one-third interest in D Pty Ltd. This is further attested to by Mr C when he states that ‘they have a deal’ regarding Mr B and Mr A.

The second email was an invitation to treat and not an acceptance by Mr B. A communication requesting for more information from the other party. This was clearly seen in the case of Harvey v Facey (1893) AC 552 where it was held that a telegraph inquiring about the lowest price of the goods was just a response to a request for information.

A lapse on the offer of Mr A to Mr B lapsed as within the ordinary cause of business the contract was not concluded unreasonable time. The offer lapsed on the effluxion of time.

In the case of Felthouse v Bindley, it was established that silence does not amount to acceptance. Acceptance must be communicated to be effective; therefore, Mr B had the obligation to communicate the acceptance.

Can Mr A argue that he has an enforceable contract with Mr C

The first time Mr A communicated his offer to Mr B the email was on ‘without prejudice’ basis. A without prejudice communication is intended to be part of the settlement negotiations. Then no rights or privileges of the parties will be lost. Since the contract was not concluded, he has no obligation to enforce it he, therefore, has the capacity to enter a contract with the other shareholder of D Pty Limited Mr C. Mr C made Mr B an offer to buy his interest in the company and Mr A made a counteroffer revoking the first offer that he is already entitled to Mr B’s interest to the company. When Mr A stated that he ‘was already entitled to it’ Mr C’s offer was not accepted. Such a comment by the offeree amounts to a rejection of the offer. When the parties meeting of minds is in question, elements of the contract are analysed objectively. This was the holding in Capeland v Alsobrook (1999) SW 598. An intention that fails to be expressed is irrelevant in determining whether there was an agreement to the terms of the contract (Monalan, 2003, 43). Courts only examine the communication between the parties and the circumstances surrounding the communication. Both the offer and acceptance must be clear as well as concise.

In the case of Empirnall Holdings v Machon Paull the court held that under the given circumstance’s acceptance was by silence since the offeree was enjoying the benefits that come with the offer fully aware of the terms of the offer.

Relevance of the Board meeting that Mr A failed to attend

The absence of a shareholder’s agreement among shareholders of a company is a major obstacle that often leads to disputes relating to matters such as how the company is run, how the company is valued or the company’s source of funds. Since D Pty Limited does not have a shareholder’s agreement there is no shareholders voting threshold (Turner,2000, 65). Common issues such as the sale of the business, making of major decisions, bringing on board new shareholders and so on is decisions that in the case is left on the companies’ board (Bishop, 2011, 13). The board has the obligation to run the company and not the allocation, purchase, and sale of shares. In the absence of a shareholder agreement only the shareholders by virtue of ownership of the unit of ownership therefore only can decide on the company’s ownership. The board meeting has no authority to make decisions on the allocation of shares.

A shareholder agreement on a typical basis covers three major areas between the shareholders financially the firm’s decision-making process as well as the mechanisms in place for transfer and sell of shares (Master & Joshua 2011, 3). The practice has shown that a board of directors who are elected to manage the affairs of the company. The board of directors have the legal authority to make decisions for the company (Master & Joshua 2011, 14). Mr A failed to attend the meeting and the board is authorized to decide of such magnitude that Mr A must abide by the board’s decision as well all the other shareholders. The shareholder’s agreement governs the relationship between the shareholders and their rights. A shareholders agreement provides for the rights of the company shareholders as well as enforcing such rights against each other. In the absence of such a document, the shareholders can only enforce their rights against each other. Therefore, Mr A and Mr B can have an agreement about the transfer of shares. Therefore, the board cannot decide for the parties who can transfer shares and who cannot.

Actions Mr A should take

Shareholders in a company that has put in place the above documents are liable only jointly and severally. In the absence of such documents, the company exists as a partnership rather than a company therefore the partners cannot be separated from the company. All the partners are therefore liable for the company. Since D Pty Company does not have these documents then the shareholders are partners and therefore, they are liable jointly and severally. Mr A can seek legal redress by suing both Mr B and Mr C.

Mr A has no enforceable contract with Mr B therefore he is not entitled to Mr B’s interest in the company.

The Doctrine of Privity of contract

Under common law, this doctrine provides that only parties to a contract can enforce their rights arising from the contract. A third party who by execution of the contract acquires benefits from it has no right whatsoever to enforce such a contract (Kincaid, 2001, 243-269).

Only parties to a contract can sue to enforce their rights under the contract or sue for damages under the said contract (Stone, 2001, 56-63). A third party who accrues benefits from the said contract can only sue under tort law if their rights have been violated. This was established in the case of Donoghue v Stevenson where it was established that a party to a contract has a duty to 3^rd parties. Mr C is not a party to the contract, he can be regarded as a beneficiary third party to the contract. He, therefore, has no authority to enforce a right or an obligation emanating from the party. He cannot communicate the acceptance by Mr B to Mr A.

Consideration is considered enforced once the one making a promise for an act in the future fulfils it to the one the promise was made to (Gava, 2006, 253-269). Therefore, in the above scenario only Mr A can enforce his promise to Mr B. The parties to the contract are under the obligation to perform their duties under the terms and conditions set in the contract (Naragan, 2008, 3). Only the parties in the contract have the right to enforce it. Only the two shareholders, Mr A and Mr B have the authority and obligation to enforce it.

References

Beatson. P. (2002) Anstons Law of Contract. 28^th Ed. Oxford University Press.

Boale, H.G. (2001) Contract Cases and Materials. 4^th Ed. Butterworths: London.

Bishop, M. (2011) How to Prepare a publishing Business for Sale. Nd. In Publishing Magazine.

Furmstone, M.P. (2001) Cheshire, Fifoot and Furmston’s Law of Contract. 14^th Ed. Butterworths: London.

Gava, J. (2001) ‘’Can Contract Law be justified on economic grounds’’. 25^th Ed. University of Queensland Law Journal.

Kincaid, P. (2001) Privity: Private Justice or Public Regulation. Ashgate Publishing: Aldershort.

Legal Norms, (1981) Offer & Acceptance. Web.

Naragan, S. (2008) Privity of Contract, JurisOnline. Web.

Master, A & Joshua, Z. (2011) What should go into a shareholders agreement. Physician’s News Digest. Web.

McKendrick, E. (2000) Contract Law. Basingtoke: Macmillan 4^th Ed.

Monalan, G and Carr-Gregg, S. (2000) Essential Contract Law.Nd.

Poole, J. (2001) Casebook on Contract Law. 4^th Ed. London: Blackstone.

Richards, P. (2007) Law of Contract, 8th Ed. Pearsons Edu.Ltd: Harlow.

Smith, J. C. (2000) Smith and Thomas: A Casebook on contract. 4^th Ed. Butterworths: London.

Stone, R. (2001) The Modern Law of Contract. 7^th Ed. London Taylor and Francis

Treitel, J. (1999) Law of Contracts. 10^th Ed. Sweet & MaxwellStevens & Sons. Web.

Turner, C. (2001) Australian Commercial Law, 28^th Ed. Lawbook Thomson Reuters.

List of Cases

Adams v Lindsell (1818) 1B & Ald 681.
Capeland v Alsobrook (1999) SW 598.
Carlill v Carbollic Smoke Ball Company 1 QB 256.
Entores v Miles Far East Corp (1955).
Harvey v Facey UKPC1.
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Limited (1952) 2All ER 456.
Barneston v Framlington Group Ltd & Another ECWA civ 502.

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