Elements necessary for a valid contract

Question:

Discuss About The Clause Otherwise Clause Rendered As Invalid?

A valid offer and acceptance is necessary to form a contract and are two of the most essential elements to make it enforceable in the court of law. Another essential element of a contract is legal intention of the parties to become legally bound by the contract as was held by the court in Harvey v Facey [1893. The person making an offer is known as the offeror and the person accepting it is the offeree. When the offer is made to the offeree, the offeree must accept the terms of the offer as it is offered and cannot incorporate any additional or new terms. After the formation of the contract, both the parties to the contract becomes legally bound by the contractual terms as was held in Riches v Hogben [1986.

In case, the offeree incorporates any additional or new terms to the offer made by the offeror, it would amount to a counter offer, which implies that the original offer shall become invalid as was ruled in Hyde v Wrench [1840. The parties to the contract may include an exclusion clause to limit the contractual liability of either party to the contract. An exclusion clause refers to the terms that limits the liability of a party to a contract provided such clauses are explicitly expressed incorporated into the contract. In L’Estrange v Graucob [1934] 2 KB 394, it was ruled that if an exclusion clause was incorporated into a written contract it shall be effective even if either party is unaware of such inclusion.

In Chapelton v Barry Urban District Council [1940], for a contract to be considered as valid, it is sufficient that the offer proposed had been accepted validly and is legitimate. However, the party incorporating the exclusion clause must inform the other party about such inclusion otherwise the exclusion shall not be considered as a valid contractual term. In Thornton v Shoe Lane Parking Ltd [1971], the court held that if an exclusion clause is detrimental to the other party who is unaware of such inclusion, the party must notify the ignorant party about such clause otherwise the clause shall be rendered as invalid.

A condition is a contractual term, which may be immediately repudiated on its infringement by the party who is affected by such infringement, and the aggrieved party becomes entitled to claim compensation from the party committing such infringement. The court shall grant damages to the aggrieved party in the form of compensation for all the losses sustained due to such breach of the contractual term. The compensation amount is determined to restore the parties to the position as they were before the violation of the condition.

Counter offers and exclusion clauses

A warranty is a term of a contract that prohibits the aggrieved party to repudiate the contract neither the contractual liability can be exempted. A warranty is not considered as an essential term of the contract as it does not form the subject matter of the contract. In case, either parties to a contract fails to act in compliance with the warranty stipulated in the contract, the aggrieved party might claim compensation for the damages sustained due to the breach of the warranty.

As per the given case, the both the Airbus airlines and Qantas Airlines have agreed on the 545 terms that have been incorporated into the contract. This establishes the fact that the companies have entered into a contract as the agreement between the parties with respect to the contractual terms implies there has been a valid offer and acceptance. Hence, the parties to the contract are legally bound by the contractual terms. Airbus provided several documents to Qantas that also included liability clause, which was originally not included in the original contract. According to the liability clause, the contractual liability of Airbus is restricted to $300000 and as discussed above, an exclusion clause may be incorporated in a contract.

However, as held in Thornton’s case, the incorporation of any exclusion clause must be notified to the ignorant party by the party incorporating such clause for the clause to be valid. In the given case, the Airbus has not notified Qantas about the incorporation of such exclusion clause. Further, the subject matter of the contract to provide a good quality plane with accessories of good quality and a video system having 36 channels. Airbus provided a video system with 34 channels only as a result of certain technical failure. This failure on part of the Airbus airlines amounts to a breach of warranty because the breach was in relation to the subject matter of the contract. Since a breach of warranty prohibits the parties to exempt from its contractual liability, but allows the aggrieved party claim compensation for the damages, Qantas shall be entitled to claim compensation from the Airbus airlines.

loss suffered by the Qantas airlines is more than $300000 but since Airbus had failed to notify Qantas regarding the incorporation of the exclusion clause it shall be held liable to pay compensation to the Qantas even if the loss exceeds $300000 and the exclusion clause shall be considered as invalid.

Incorporation of exclusion clauses and notification

In Edgington v Fitzmaurice [1885] 29 Ch D 459, misrepresentation is defined as false statements of facts that induces an individual to enter into a contract and become legally bound by the contractual terms of the contract. The term puffery refers to the self-evident statements that are used for the purpose of advertising. Since puffery has no legal significance, no claim cannot be made against it whereas in order to establish a claim against misrepresentation, the aggrieved party must establish that the person causing misrepresentation has made a false statement with a view to induce the person to enter into a contract and become legally bound by the contractual terms.

Further, in order to make a claim with respect to misrepresentation, the aggrieved party must establish that he/she was not aware of the false nature of the statements and that their judgments shall not be affected by it. In Hill v Rose [1990] VR 129, it was observed that the false nature of the statement made by the person committing misrepresentation must be established and that the aggrieved was induced by such person who entered into the contract by relying on such false statements.

In Lockhart v Osman [1981] VR 5, it was observed that silence cannot be considered as misrepresentation and the aggrieved person must establish that he/she was convinced by the person committing misrepresentation to enter into the contract. However, when the party causing such misrepresentation is aware of the fact that he is making false statements and still induce the aggrieved party to enter into a contract, such misrepresentation may be termed as fraudulent misrepresentation. Under such circumstances, where the party committing misrepresentation amounts to fraudulent misrepresentation, the aggrieved party is entitled to claim compensation from the person committing such fraudulent misrepresentation was held in the Derry v Peck [1889] 14 App Cas.

Again, according to the rule of agency, the principal is bound by the actions of the agent as was held in Pioneer Mortgage Services Pty ltd v Columbus Capital Pty Ltd [2014] FCAFC 78. However, if an agent has an apparent, expressed or implied authority, the principal is bound by the actions of the agent or for the activities carried out within the course of employment. In Watteau v Fenwick [1983] 1 QB 346, the court held that even if the agent is not authorized by the principal and the principal-agent relationship does not exist, the principal shall be liable for the actions of the agent, if the agent deal with any third party who is unaware that the agent is unauthorized.

Conditions and warranties in contracts

In the givens scenario, Gamma works as a sales person in Frank’s Appliance shop and there was dishwater worth $350 present in the shop. Tom a customer after seeing the dishwater told Gamma that she would inform her whether he would purchase the dishwater at the stipulated price. Gamma was aware that her niece Frances needed a dishwater and told her that she could sell the dishwater at $300. She convinced Frank that the dishwater would not sell at $350 and she could arrange a customer who would buy it for $300. Frances was induced by Gamma and relied on her statements as she was salesperson and authorized her to sell it for $300 to Frances. Gamma was aware that she was making false statement that the dishwater could not be sold for at $350 where Tom said if he can, he would buy it for $350.

Under such circumstances, it is established that Gama had committed fraudulent misrepresentation by making false statement regarding the sale of the dishwater at $350 and induced Frank to sell it for $300 to Frances. Later, Frank found that Tom would have purchased the dishwater for $350 only. Hence, Frank is entitled to claim compensation from Gamma of $50 for committing fraudulent misrepresentation.

In the subsequent scenario, the Bob is a sales person who was authorized to sale washing machines and he often dealt with Angela for selling the washing machines. Bob was often careless about his work and came to office while drunk, due to which Frank had suspended Bob from the job. Bob ceased to have any authority to act on behalf of the principal, Frank. However, Bob sold the washing machines at $1000 each for which Angela had deposited $10000 in the bank account of the Home Appliance Specialists bank accounts. Bob takes the amount from the account and goes overseas.

Under such circumstances, Frank did not ensure whether Bob had actually left the workplace after being suspended. Here, while Bob entered into a contract with Angela, she was not aware of the fact that Bob was suspended and does not have any authority to deal with third parties on behalf of the principal, Frank. Since Angela had dealt with Bob regarding the sale of washing machines so she was not aware of the authority of Bob to deal with third parties.

As was observed in Watteau’s case, if any third party has entered in to a contract with an agent who does not have the authority to enter into contract with third parties on behalf of the principal because the agent ceased to have any authority, the principal shall be liable by the acts of the agent. The principal shall be held accountable for the acts or omissions of the agent despite the fact that the agent, while dealing with the third parties was aware that he is not authorized to make such deal with the third party. The principal is bound by the actions of the agent owing to the implied authority that is conferred upon the agent by the principal.

Here, Bob was aware that he was no more authorized to enter into any contract or deal with respect to the third parties on behalf of his principal, Frank. However, he still entered into a contract with Angela with respect to the sale of the washing machines for $1000 each and usurped the deposit amount of $10000 from the Home Appliance Specialists bank account. Moreover, sine Frank had an implied authority he was bound by the actions or omissions of his agent , Bob. The subject matter of the contract was to sale washing machines to Angela for which she had already paid an deposit amount of $10000. If the washing machines are nit delivered it would amount to a breach of the contract.

Conclusion

Since Angela was not aware of the fact that Bob did not have any authority to sell the washing machines while she entered into the contract, Frank is liable for the contract and he must deliver the washing machines. Nevertheless, Frank is entitled to claim compensation from Bob.

Reference List

Edgington v Fitzmaurice [1885] 29 Ch D 459

Hill v Rose [1990] VR 129

Lockhart v Osman [1981] VR 5

Derry v Peck [1889] 14 App Cas.

Pioneer Mortgage Services Pty ltd v Columbus Capital Pty Ltd [2014] FCAFC 78

Watteau v Fenwick [1983] 1 QB 346

Harvey v Facey [1893

Riches v Hogben [1986

Hyde v Wrench [1840

L’Estrange v Graucob [1934] 2 KB 394

Chapelton v Barry Urban District Council [1940]

Thornton v Shoe Lane Parking Ltd [1971]