QUESTION
1. Laura owns an interior design business and is interested in leasing a state-of-the-art photocopy machine. Seb manufactures and leases photocopying machines designed for customers with special requirements.
Laura asked Seb about the speed of the photocopy machines. Seb replied “These machines are faster than light”. Laura also asked whether there are any parts of the machine made in Ruritania (fictitious country) as she is concerned about the lack of quality control in that country. Seb said “Um, … in my humble opinion, all parts of the machine are probably made in Australia.”
Seb told Laura that if she enters into a lease with him, there are certain expectations and obligations that she, aslessee, has to observe. Seb stressed that the lesseemust make punctual payment of the agreed monthly rent.He added that the lesseewill disconnect the power supply to the machine at the close of business each day. Lastly, Seb said that the lessee will notify him immediately of any fault in the machine and will not permit repairs to be carried out by any other person other than Seb’sauthorised representative.
In January 2011,Laura leased a photocopier from Sebfor 5 years at a monthly rental of $2,000. Seb recently discovered that Laura sometimes allowed the power supply to remain connected overnight and has repaired minor faults herself on a few occasions. Laura was also 1 day late in paying last month’s rent.
Laura discovered that the machine was not of speed and it took her twice the time to photocopy compared to her previous machine.She also heard from reliable sources that parts of the machine are made in Ruritania.One evening there was some smoke from the machine, causing considerable damage to Laura’s expensive curtains and furniture in heroffice. There is apartially hidden sign in Seb’s office which provides:“Seb & Co accepts no liability for any loss or damage howsoever caused”.
Students are to confine their answer to material covered in Topic 5
a) Using the four step process, adviseSeb who is considering terminating the lease so that he could lease the same photocopier to a new customer.
b) Using the four step process, adviseLaurawho is considering suing Seb for the loss she has suffered.
SOLUTION
a) Using the four step process,advice Sebwho is consideringterminating the leaseso that he could lease the same photocopier to a new customer.
Step 1: Seb entered into a lease agreement with Laura which clearly defined the three important terms and conditions for the lease contract to be valid which were:
- Punctual payment of the agreed monthly rent every month should be done by Laura for the lease agreement to stay valid.
- Laura was supposed to disconnect the power supply to the photocopy machine every day after closing the business.
- Laura was supposed to be notifying Seb immediately about any fault in the photocopy machine and the fault should not be corrected by any other person except for Seb even if it was a minor fault in the photocopier. Only the authorised representatives of Seb were supposed to repair the photocopy machine whenever any fault rose in the machine.
But here in this case it has been found that although both Laura and Seb entered into a Lease contract through mutual agreement Laura did not follow any of the main important points which were the valid part of the contract between the two. The legal issue out here is that both the parties were in the capacity to contract and there were elements of agreement too but there were certain presumptions regarding commercial agreements. The contract has been totally valid as both the contracting parties are:
-age of majority, neither Seb nor Laura is minor
-both of them are in sound mind
-entering a lease is not forbidden under any other law too, such kind of lease is valid everywhere and all around theworld. There is a clear intention between both the parties to be legally bound. But after few months Seb found that all the legal considerations of the lease were broken or not followed by Laura the promise and “no consideration means a contract” which simple indicates that there has been breach of contract in this case by Laura. As she:
-delayed the monthly payments for the photocopy machine every month by a day or two.
-many a times it was found that she forgot or left the power supply switched on to the photocopy machine although it was clearly mentioned by Seb not to do so.Seb had already indicated on a small message board in his office which said that “Seb & Co. accepts no liability for any loss or damage howsoever concerned” .So it was Laura’s fault if she did not read it as Seb had clearly mentioned in writing about this situation that no claim about any damage will be entertained by Seb, this clearly indicates that he is not at all liable to pay any kind of losses.
– She got the minor repairs done on her own instead of calling the authorised representative which Seb had mentioned in the lease contract.
Step2: The law of contracts is the oldest and primary branch of law which is related to business or any commercial transaction and it has been found to be present in our society from very long time in one form or the other to make our society an organized society.
Agreements and contracts are two different things and most important parts of any valid contract are proposal and then acceptance of that proposal. Then there should be consideration which should be lawful and should have a lawful object attached to it. The two contracting parties should be competent enough to contract with each other. The contract should be done with free consent and there should not be any kind of force or pressure. An agreement cannot be expressed to be void and it should not be declared. There should be proper writing and registration required by law. There should be at least possibility of performance and certainty too.. (Macsain, essential elements of valid contract, http://www.scribd.com/doc/16514116/Essential-Elements-of-a-Valid-Contract)
There has to be formation of an offer for a valid contract between the two parties entering the contract. The agreement between the two contracting parties is the first and important step for formation of any contract. Thus an offer is a kind of communication which is made by one of the parties to another party or offeree. No offer becomes effective till the time it is communicated to the offeree. (Essel.R. Dillavou, Principle of Business Law, Book 1, Chapter 1)
In some cases the doctrine of consideration mentions that when at the desire of the promisor the promise or any other person has done or abstained from doing or does or abstains from doing or promises to door to abstain from doing something such actor abstinence or promise is called consideration of promise. Every contract is made up of two parts promise and consideration. A promise is made for return of a promise and consideration is the cause of promise. It is for the promisor to directly or indirectly stipulate the consideration for his/her promise, not for the promise to offer something and call it a considerations. The most famous example here is Chappel & Co. Ltd Vs Nestle Co Ltd where Nestle advertised in order to increase its sales that one how will send three chocolate wrappers the company will supply a record to anyone who sent it money. The issue was that did the wrappers form the part of consideration for sale of record. The wrappers were not part of consideration here rather they were just eth condition for qualifying for the person to buy the record.
Agreements which create legal relations or are capable of creating legal relations are also contracts for example if someone invites you to dinner it is not creating any legal relation so it is not a contract.
In many cases it has been found that even oral contracts are also valid contracts everything does not have to be in writing. But if required by law then the contract should be in writing and registered too. If the agreement is a commercial one, the parties will normally intend it to be legally binding.Because in such cases showing it otherwise will be very difficult. Where the parties who do not want it to be legally binding they can go for honour clauses which indicates that the agreement is binding for honour only. As found in the case of Rose and Frank Co. VsCrompton (1923). In this case Rose and Frank made an agreement with Crompton regarding supply of tissue papers where the court saw that there was no agreement which they made and there was no written memorandum in the form of legal agreement, thus there was no case of legal jurisdiction in the court of law but it was stated that it was just the intention to enter into contract on the basis of past business that they wanted to do business.( Julie Law, Australian Contract and consumer law, 17 January 2011,http://www.australiancontractlaw.com/index.html ( Accessed on 30 October 2011)
Breach of Contract is seen to be occurring if any of the parties be it the promisor or the promise is unable to perform and that person is said to be guilt of breach of contract. In this case the promise can proceed as soon as breach is committed or wait till the performance arrives for example in the case of suit for injunction between Brooke Bondltd. Vs Vijay Mallaya.
Step 3: Here in case of Seb and Laura it was typically an express Contract where all the terms of the contract were expressed in a verbal or written agreement between the two parties. All the terms were either mentioned in the lease contract or were told verbally to Laura by Seb even the claims about the damage was mentioned in written form in his office. Thus the contract was totally valid in this case.
As in this case of Laura and Seb there was capacity to contract but the consideration was not taken into mind by Laura. She switched on the power supply maximum times although it was stated by Seb to switch off the power supply. Similarly there was again breach of contract when Laura left the power switch off after completing days work , although she was already asked by Seb to switch the power off after completing days work.
Similarly as we all know here there was Breach of contract on Laura’s part as she did not make the payments on time as asked for in a month. Secondly she did not call the authorised representatives for mending the photocopy machine was asked by Seb.
This case clearly indicates that there were presumptions regarding commercial agreements between Laura and Seb, because the lease agreement between the two parties was made in commercial context. The court will follow the presumption that Seb had orally notified Laura about the important thing she should have followed which she never did and that why the agreement will stand void between the two.
Step 4: In conclusion, it can be said that the lease agreement between Laura and Seb is no more legallyvalid, because Laura breached the valid contract conditions, thus Seb has the right to take back his photocopy machine from her and rent it out to another client with his terms and conditions.
b) Using the four step process, advice Laurawho is considering suingSeb for the loss she has suffered.
Step 1: Laura made a lease agreement with Seb about hiring the photocopy machine for 5 years and they made a valid contract by signing the lease agreement.However before signing the lease agreement Laura asked about few questions which she wanted to be clear about.
– The speed of the photocopy machine. When she asked about the speed of the photocopy machine, Seb said that its speed was faster than light, whichtotally wrong information was given to Laura. When Laura used that machine she found that the speed was much slower than her earlier photocopier.
– The second thing which Laura asked was that were there any parts of the photocopy machine which were made in Ruritania, then she wanted to confirm that there should not be any part made of that country in particular.However, Seb said that he did not think so that any part of the photocopy machine was made in Ruritania. Later Laura found that there were few parts of the machine which were made in that country.
– Lastly it should have been mentioned clearly in the contract or the lease agreement that Seb and Co. Is not liable for any kind of damagedone by the photocopy machine, which they had mentioned in the office but it was more or less in hidden form. The hidden sign was not noticed by Laura while making the contract deal and that is why she made the deal and signed the lease agreement under the false perception that if any damage happens in the office or to the property she would be liable to get paid for it by Seb & Co.. However nothing happened like this.
That is why she is planning to sue Seb for the damage done to her office property due to the photocopy machine.
Step 2:
There are mainly three elements of contract which can be legallyenforced; the contractshould be intention to contract, agreement and consideration for contract. Agreement of the contract means there should be an offer and acceptance of contract. The agreement is said to be a contract in case when it is made with lawful object and a lawful consideration is needed for it. The consideration of any agreement is unlawful if it is forbidden by any law or it should not be of such nature that if permitted it should not result in defeating the provisions of the law.
Provision of any law. The agreement is considered to be valid if it is not fraudulent or if it involves or implies any kind of injury to the property of the person then it is considered as unlawful. The court will also regard such kind of agreement as immoral and against the public policy. In all these cases the consideration or the object of consideration is considered to be unlawful and the agreement whose any element is unlawful is considered to be void.. (Macsain, essential elements of valid contract, http://www.scribd.com/doc/16514116/Essential-Elements-of-a-Valid-Contract( accessed 30 October 2011)
There should be the element of certainty in case of any contract to be legal. The terms and conditions of the contract should be totally clear and visible. In other words you can say that the terms of contract should not be vague, they should be clear and distinct. Vague and hidden contracts are not liable to be enforced.
This can be analysed from the case of Merritt v Merritt in this case we can clearly see that there has been concerns regarding presumptions of intention. Here they found that both the husband and wife entered a legal agreement that if wife paid the mortgage the house will be transferred in her name which was not done , so the court just analysed whether there was presumption regarding the social and domestic agreements was rebutted or not . Since it was done so the case was given in favour of wife. (AsifTufal, Intention to create Legal Relations, www.lawteacher.net( accessed on 30 October 2011)
IN case of business agreements it has been seen that there is clear intention of getting into agreements in order to create legal relations between two or more parties. After making any commercial contract nobody can claim that they did not have any intention of getting onto legalrelation with the other person or company, till the time it is explicitly mentioned. The other way which they can follow to do so is to make sure that inadvertently also their negotiations should not become contract , this should be made sure by the parties who are doing negotiations as seen in case between masters vs. Cameron.Thus the party can mention” subject to contract” in each and every document of communication before a formal contract is being reached at.. (Julie Law, Australian Contract and consumer law, 17 January 2011,http://www.australiancontractlaw.com/index.html (accessed 30 October 2011)
But in some cases it has been found that the intentions to createlegal relations are rebutted. In this case the party claiming the presumption should not apply needs to present evidence to the courts to prove itself. Like in case of Edwards vs. Skyways Ltd. where the airline company promised to make payments ex gratia to its entire airline pilots who were redundant.On this dispute the pilots were supported by pilots union calledBALPA. The payment was mentioned by Skyways as the “approximating to the company’s contribution for each member of pension and superannuation fund”. But later Skyway decided not to make any such payments to the pilots. The issue raised over here was that whether the promise to make ex gratia payment legally binding, it was conceded that it was just a consideration for promise but not any agreement for promise.
Step 3: As we all know that an agreements is only legally enforceable if the parties are legally bound to each other when the agreement is made. If we assess the circumstances objectively between Laura and Seb and study the circumstances in which they entered the legal lease contract, then it is clear that they entered a legally binding contract which is the lease contract.
Moreover there are explicit facts which clearly indicate that the rental agreement was made in purely business or commercial context.Thus there was purely intention of getting into agreement by both the parties however it was found later by Laura that Seb did not disclose the real information, the information about the parts of photocopy machine being from Ruritania was hidden from Laura. When she asked about the parts of machine, Seb should have disclosed the real information that the parts were made in Ruritania, which was not done by Seb.
The clear information about the speed of the photocopy machine’s speed was not give. He gave totally false information which was later discovered by Laura that the speed was much slower than her previous photocopier. Seb cheated her by giving false information as per the valid contract. She should have been told about the real speed of the photocopy machine.
Any kind of injury to the person or property is considered to be liability of the promisor. But Seb did not mention it clearly this thing in contract. When the expensive curtains and many more things in Laura’s office were damaged due to fire which originated due to the photocopy machine, he should be liable to pay the damages. Either he should have mentioned clearly this statement in the contract which he did not do. This means he committedfraud and cheating in this lease case.
Stating false information or hiding any kind of important information is likely to be considered as fraud and should be sued.This was done by Seb while leasing the photocopy machine which causedsevere damage to the property in the office of Laura.As already mentioned that vague and hidden contracts are not at all liable to be enforced. This is very true in case of Laura and Seb, Since Seb had hidden very important and crucial information about paying or being liable to any kind of damage caused by the photocopy machine, he has committed an act of fraud which is not justified and clearly shows his intention of not following the elements of agreement, which is unlawful and should be sued by Laura. Laura needs to getpaid for all the damages she is liable to as she never intended to lease a photocopymachine which is slow and has parts from country called Ruritania. Seb just made presumptions regarding commercial agreements and misquoted the right information or tried to hide it form Laura.
Step 4: In the conclusion, it can be very clearly inferred that the lease agreement was legally enforceable and both Laura and Seb were legally bound at the time when the agreement of leasing the photocopy machine was made. Laura has full right to sue Seb asking for payments for the damage done to her physical property due to the photocopy machine.
Bibliography
Dillavou, R.E. , Principle of Business Law, Book 1, Chapter 1
Law, Julie., Australian Contract and consumer law, 17 January 2011,http://www.australiancontractlaw.com/index.html
Macsain, essential elements of valid contract, http://www.scribd.com/doc/16514116/Essential-Elements-of-a-Valid-Contract
Tufal,A. , Intention to create Legal Relations, www.lawteacher.net
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