LEVEL 3 - UNIT 2 CONTRACT LAW SUGGESTED ANSWERS - JUNE 2013

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1 Note to Candidates and Tutors: LEVEL 3 - UNIT 2 CONTRACT LAW SUGGESTED ANSWERS - JUNE 2013 The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the June 2013 examinations. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners reports which provide feedback on student performance in the examination. SECTION A 1. The doctrine of privity of contract provides that, generally: only the parties to a contract are bound by it; and therefore only the parties are able to bring a court action to enforce it. 2. A counter offer exists where the offeree answers an offer with another offer. Its effect is that it ends the original offer (rejection). A relevant case could be Hyde v Wrench (1840). 3. If the offer is for a limited period it expires at the end of the period. If no period is stated, it lapses after a reasonable time. What is reasonable will be decided by courts on all the facts of the case. A relevant case could be Ramsgate Victoria Hotel v Montefiore (1866). 4. (a) Executed consideration exists when one party performs his part of the contract at the time of the agreement. (b) Executory consideration exists when the parties to a contract exchange promises to do something in the future. 5. In a commercial or business agreement there is a presumption is that a legal relationship is intended. The words binding in honour only (often known as an honour clause ) rebut that presumption. A relevant case could be Edwards v Skyways Ltd [1964]. 6. (a) An express term is a term agreed by the parties; (b) The effect of signing a written contract is that the signatory is bound by the terms of the document whether or not he/she has read it. A relevant case is L Estrange v Graucob (1934); Page 1 of 6

2 The notice purporting to exclude liability which was in the hotel room had no legal effect. As the contract had been entered into between Mr & Mrs Olley and the hotel before they went up to their room, notice of the purported exclusion was given too late. 7. A condition is an important clause in the contract (it goes to its very root) and entitles the injured party to treat the contract as at an end (repudiate it) and/or claim damages. A relevant case could be Poussard v Spiers (1876). 8. The traditional remedy available for innocent misrepresentation is rescission. However, under s.2(2) Misrepresentation Act 1967, the courts may award damages in lieu of rescission. The remedy of damages here is equitable (discretionary). 9. Frustration means that there must be: a supervening event; something essential to the contract destroyed unforeseen circumstances; no fault of either party. Frustration brings the contract to an end, preventing a party from being able to perform the contract. 10. The purpose of damages in contract is to provide monetary compensation aimed at putting the injured party in the position he would have been in had the contract been properly performed. Scenario 1 Questions SECTION B 1. (a) A good answer would have identified any three of the following: offer; acceptance; consideration; intention. N.B. Reference to Agreement would have received credit in lieu of both offer and acceptance. Each of the three elements identified should then have been explained. For example: an offer is a proposition intended to be binding; acceptance is the unconditional agreement to the terms of the offer; consideration is what each party promises to do; intention is the intention to form a legally binding relationship. (b) An offeror may, generally, withdraw an offer at any time before acceptance. To be effective the revocation must be communicated to the offeree. However, in the event of a unilateral offer, withdrawal may not happen after the offeree has begun to perform the act requested. A relevant case could be Errington v Errington (1952). A good answer would have explained that: Page 2 of 6

3 Abbi s letter of 2 March amounts to an offer; There was a purported revocation on 4 March; Revocation is not effective until communicated on 6 March; Dev is therefore able to accept Abbi s offer on 5 March; Dev s amounts to acceptance (unqualified assent to the terms of the offer); Acceptance appears to have been validly communicated by on 5 March provided the was sent within normal business hours; A valid contract exists at the price of 2,500. A relevant case could be Brinkibon Ltd v Stahag Stahl und Stahlwarenbandelgesellschaft mbh (1982). 2. (a) A good answer would have identified the issue of remoteness. It would then have explained that the injured party must show that: a reasonable person would have anticipated the loss being a reasonably foreseeable result of the breach; the defendant had been specifically warned of the potential loss. (b) Causation would be satisfied here as Abbi only had to turn down the graphic design work because she had no computer at the time. However, a reasonable person would probably not have anticipated the loss of this valuable contract as a likely result of the breach and Carriers Unlimited had not been specifically warned of this potential loss. They need not know that Abbi had no other computer and there is therefore no reason why they should have contemplated the loss as a potential consequence of their delay. A good answer would also have pointed out that Abbi seems to have made no effort to mitigate her loss. In all the circumstances, Abbi is unlikely to be able to recover the 5,000. A relevant case could be Victoria Laundry v Newman (1949). It should have been explained that the claimant must take reasonable steps to minimise any loss. Therefore Abbi should, perhaps, have hired a computer rather than turn down the graphic design work. Damages are therefore likely to be reduced. 3. A good answer would have explained that the courts are reluctant to award damages for loss of enjoyment. However, Abbi may be able to claim nonpecuniary damages here as the contract was to provide pleasure, relaxation, peace of mind and freedom from distress. Abbi wanted a quiet and secluded seaside cottage but got one next door to a lively bar band opposite a crowded beach. She could therefore claim for damages to compensate for disappointment and distress as in the case of Jarvis v Swan Tours (1973). Scenario 2 Questions 1. (a) Candidates should have identified that an offer may be terminated, first, by a counter-offer or by rejection and explained that a counteroffer rejects/ends the original offer. A relevant case could be Hyde v Wrench (1840). They should also have identified that it may be terminated by revocation and explained that an offer may be revoked at any time before acceptance as in the case of Payne v Cave (1789). Page 3 of 6

4 Another method of termination would be by passage of time. It should have been explained that an offer terminates at end of fixed period or after a reasonable time. A relevant case could be Ramsgate Victoria Hotel v Montefiore (1866). Finally it should have been identified that an offer may also be terminated by acceptance and candidates should have explained that this requires a final and unqualified acceptance of offer which must mirror the offer and that acceptance must generally be communicated to offeror. (b) A good answer would have explained that the Battle of Forms means that the last party to send a form wins as in the case of Butler Machine Tool Co v Ex-Cell-O Corporation (England) Ltd (1979). Candidates should have explained that George s Stoves Ltd s quotation amounts to offer and that Flo s order amounts to a counter-offer without a price variation clause. This counter-offer rejects the original offer, including price variation clause. George s Stoves Ltd s return of tear off slip evidences acceptance of Flo s counter-offer. A suitable conclusion would therefore be that Flo is not liable to pay the additional 2, (a) A representation is a pre-contractual statement and may include a mere puff. If untrue, it may lead to an action for misrepresentation. A term, however, is intended by parties to be part of the contract and may be either express or implied. Breach of a term may lead to an action for breach of contract. (b) A good answer would have identified the following: The importance of the statement. Thus, if the person to whom the statement is made would not have entered the contract otherwise the statement may be a term. Relevant case law could be Bannerman v White (1861). Whether the statement has been reduced into writing. It should have been explained that statements not reduced into writing in the contract are usually mere representations. Relevant case law could be Birch v Paramount Estates (1956). The timing of the statement. The longer the gap between the statement and the contract the more likely it is to be a representation. Relevant case law could be Routledge v McKay (1954). Specialist knowledge or skills. It should have been explained that if the person making the statement has specialist knowledge/skill the statement is more likely to be a term. A relevant case could be Oscar Chess Ltd v Williams (1957). A good answer would have contained an appropriate discussion of each of the following points: the statement was made before the contract; the statement appears to be important to Harjit; the statement appears not to have been reduced into writing; the apparently short time gap between the statement and the contract; and Page 4 of 6

5 it would appear that Flo should have specialist knowledge/skill. On balance, the statement would be likely to be a term implied into the contract but any reasoned conclusion that it is a term or a representation would have received full credit. 3. Candidates should have explained that under s14(2) Sale of Goods Act 1979, goods must be of satisfactory quality. A good answer would than have continued to explain what amounts to satisfactory quality e.g: they meet the standard that a reasonable person would regard as satisfactory. Factors to be considered in deciding this are: The state & condition of the goods Fitness for all the purposes for which such goods are commonly supplied Appearance & finish Freedom from minor defects Safety Durability The section applies here, as goods sold in the course of business. A good answer would have continued to apply the law here to the facts. For example: A major defect indicates not suitable for purpose of cooking The stove is unsafe A relevant case could be Rogers v Parish (Scarborough) Ltd (1987). Scenario 3 Questions 1. (a) A good answer would have explained that a condition goes to the very root of the contract and entitles the injured party to repudiate the contract and claim damages, as in Poussard v Spiers & Pond (1876). It would also have explained that a warranty is a less important term which only entitles the injured party to claim damages whilst the contract continues in existence. A relevant case here could be Bettini v Gye (1876). (b) A good answer would have explained that an innominate term is a term which is not clearly a condition or a warranty; the court will wait and see what is the effect of any breach before deciding whether to treat the breach as a breach of a condition (if fundamental/goes to the root of the contract) or as a breach of a warranty (if it does not). A relevant case could be Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962). Candidates should have explained either that: as Lee is the lead singer/front man, this is likely to be a breach of condition; if so, Imran can repudiate the contract; and claim damages. And/or that: as only the first of a series of concerts is affected, this is likely to be a breach of a warranty; if so, the contract must continue; Page 5 of 6

6 but Imran can claim damages for any loss he may incur. 2. (a) Candidates should have identified and explained the four methods by which a contract may be discharged, thus: Discharge by performance. Candidates should have gone on to explain that in an entire contract, for example, both parties must do just what they promised and, ideally, referred to at least one exception, namely part performance, substantial performance, prevention of performance or a divisible contract. Discharge by breach. Here candidates should have explained that, for example, a breach of a condition entitles the injured party to repudiate. Discharge by agreement. If, for example, neither party has performed, mutual promises not to enforce amount to consideration; otherwise consideration must be provided (accord and satisfaction). Discharge by frustration. This could be explained as an event which is fault of neither party and which renders performance of the contract impossible. A good answer would have been supported by relevant case law such as Krell v Henry (1903). (b) Candidates here should have explained that the contract would appear to be an entire contract. Therefore, if Mike has not fulfilled all his obligations Imran will not have to pay him anything. A good answer would have gone on to identify the possible issue of substantial performance; if Mike has substantially performed the contract Imran will have to pay 4,500. Relevant case law could include Bolton v Mahadeva (1972) and Hoenig v Isaacs (1952). A reasoned discussion of acceptance of part performance would also have been awarded credit as would an appropriate reference to the need for reasonable skill and care under s.13 Supply of Goods and Services Act Here, it should have been explained that Nona appears to be in breach of a condition and Imran would therefore be entitled to repudiate the contract. He could also claim damages for any loss he has suffered and that, as Olivia s fee was greater than Nona s, he is likely to be able to claim the excess. A relevant case could be Poussard v Spiers & Pond (1876). (d) It should be explained that Imran can agree to release Olivia from her contract but that, as Olivia has started to perform her obligations, she will have to give some consideration (satisfaction). (e) Candidates should explain that the cancellation of an event which is the sole reason for the contract not taking place can be frustration. A relevant case could be Krell v Henry (1903). However, where the contract can still take place meaningfully without the event it will not be frustration. A relevant case here could be Herne Bay Steamboat Co v Hutton (1903). A good answer would have gone on to apply this law and shown that, as Imran could still hold the concert, he cannot treat his contracts for the sale of tickets as frustrated. Therefore ticket holders could not claim money back. Page 6 of 6