MGMT1601 Business Law

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MGMT1601 Business Law

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MGMT1601 Business Law

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Course Code: MGMT1601
University: Bow Valley College

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Country: Canada


1.Josie makes a living painting watercolour pictures and selling them from her studio located in her house.
On Sunday 19 February, Sam visits her studio and admires a painting of sunflowers. The price tag indicates it is for sale for $900. Sam offers Josie $700 for it, but Josie says that she cannot accept less than $800.
Sam indicates that would be a good price but asks Josie to hold the painting so his wife could also look at it and approve his decision. However, Sam points out that the earliest his wife could do so would be the following Tuesday, 21 February. Josie said that would be fine and gives Sam a form that reads:
I, Josie, offer to sell Sam one framed picture of sunflowers for $800. This offer shall expire at midnight on Tuesday 21 February.
Signed: Josie
The following day, Monday 20 February, Wendy, an art enthusiast, visits Josie’s studio and is very impressed by the same painting. Without haggling over the price, she buys the painting for $ 900 cash and takes it away with her.
The same day, Josie phones Sam and leaves a message on his answering machine saying that the painting has been sold for $900. Sam does not return the call, apparently unable to retrieve any messages due to the machine being faulty for the past few days.
On Tuesday 21 February, Sam told his wife about the painting and she is very enthusiastic about it. She tells Sam to go ahead and buy it for $800. At 10 am that day Sam telephones Josie and after only managing to greet her, he is cut off as Josie’s telephone goes dead due to a flat battery. Sam is unable to continue the conversation and Josie does not attempt to call him back. Instead, an hour later, Sam decides to post a letter to Josie formally accepting Josie’s offer. The letter arrives in the mail at Josie’s house on Thursday, 23 February.   

Advise Josie whether there is a binding contract with Sam.  
For the purpose of this part only, assume a contract had been formed between the parties. Explain briefly whether a breach of contract has occurred and identify the remedies that might be available.   

2.The rule in Pinnel’s case expresses the requirement for consideration in simple contracts. Generally, the rule works sensibly and fairly, but there are some situations when it does not.
Discuss this statement, and explain the circumstances in which courts see it as unfair to apply this rule.   

1.Josie and Sam

The scenario raises questions as to the extent to which promises to offer open until a certain date could be binding, and what manner should the revocation of such offers take particularly in what seems to be a unilateral contract.
Rule of law
One of the rules in offer and acceptance is that obligations only arise when a contract has been fully formed. Therefore, an offeror is free to revoke the contract as far as the offeree has not started the act of acceptance. However, some problems arise when there is a promise to keep the offer until a particular date. The authority in such a situation can be deduced from the decision of of Routledge v Grant where the court held that promises of this nature cannot generally create any obligation, thus not binding.  The reason why the promise would not be binding it is that the law will not enforce an agreement that does not have a consideration as explained in Dickinson v Dodds.  Therefore, where there is no consideration provided, and an offer has not been accepted, the offeror is free to revoke it any time he wants.
Revocation of an offer has to follow the principles of the law of contract law. For instance, an offeror must notify the offeree of the termination of the offer. The normal rules of revocation of an offer are those that apply to the acceptance of an offer. The authority for this rationale is in  Byrne v van Tienhoven where the court ruled that a message of revocation of an offer sent through telegram would effective when the offeror receives it. The same principle was also held in the case of Entores v Miles Far East Corporation that where parties contracting are using instantaneous means of communications, notification would take place when the other party receives it.  In the postal rule, notification of either acceptance or revocation follows the rules set in Adam v Lindsell where the court settled that the notification would be deemed completed when the letter has been posted.  
(i) Advise to Josie whether there is a binding contract with Sam.  
On analysis, it first seems that Josie had already promised Sam that the offer will remain open until the 21st Tuesday, at midnight. However, Josie is selling the painting to Weddy before 21st contrary to Sam’s promise. As discussed above, the case of Routledge v Grant ruled that such promises could not be binding. The case of Dickinson v Dodds elaborates further that such promises are not binding unless they are supported by consideration. So, the promise to keep the painting until Tuesday, 21 at midnight was not binding to Josie.
However, Josie should follow the rules of revocation of an offer. Like as mentioned above in Byrne v van Tienhoven that a notification for revocation will only have effects when the offeree receives it. From the facts provided, Josie phoned Sam and left a message of revocation, but this message did not reach Sam due to Sam’s faulty machine. Situations of faulty machines were dealt with by Lord Denning in Entores v Miles Far East Corporation. The judge stated that if without a fault the sender of the message reasonably concludes that the message reached the recipient, the fault cannot be blamed on the sender.  Moreover, such a case was dealt with in form of ‘fault allocation’ in the decision of Brinkibon Ltd v Stahag Stahl where the court stated that judges should refer to the sound business practices, parties’ intentions, and reasonably finding where the fault lies. Therefore, the fault did not arise from Josie end, and he reasonably believed that the message was read by Sam, and it was Sam’s fault for having a faulty machine.
On the part where the phone died and Josie did not bother calling back, there was no reason for calling back since he believed that the message already reached Sam the day before, and there was no room for further negotiations.
There was no valid contract. The statement to keep the painting until Tuesday, 21st midnight was not binding since it was not supported by consideration. Additionally, even if Sam did not receive the message for revocation, Josie cannot be blamed since it was Sam’s fault.
(ii) What if there was a contract, would Josie be in a breach of contract? What remedies are available?   
What constitutes a breach for a sale contract, and what remedies are available?
Rule of law
A breach of contract occurs when one of the contracting parties breaks one or more of the agreed terms or shows an intention of breaking the terms.  This rationale was set in the decision of Hochster v De la Tour where the court held that where two parties’ contract and one party notify the other that it intends to not perform, the innocent party can end the contract and claim file a claim for the damages arising from the breach even before the actual breach has not occurred.
When a breach occurs in the contract of sales, the court allows the purchaser to raise a claim for compensatory damages. These are the damages that put that party to the position it would have been had the breaching party honored the agreement as stated in Robinson v Harman where the court awarded Robinson damages for the expenses incurred and the loss of his bargain. In a breached sale contract, the buyer is awarded the total reasonable cost of replacement. Another type of damage is the incidental damages. These are a cost that the innocent party undergoes that result directly from the breach while trying to recover from the losses caused by the breach. For instance, the cost of traveling to find a replacement. Other types of damages are called the consequential damages. These include the lost profits or injuries resulting directly from the breach.
On the application of the rules to this scenario. Sam would have to get the painting from somewhere else. However, like as stated above. Sam would be awarded compensatory damages which would be the cost of getting the same painting from the market. Any difference above the $800 would be charged to Josies. In addition, Sam would also be awarded incidental damages. These would be the costs that Sam would incur which would be directly related to finding another painting. Sam may also recover consequential damages, but these must arise directly from the breach.
Sam would be awarded compensatory damages for getting another painting. He would also receive incidental and consequential damages.
2.Pinnel’s Case
The panel’s case deals with issues of part-payment of debts where the creditor can accept a lower sum in cancellation of the entire debt owed by the debtor. However, this case established that the creditor can dishonor this agreement anytime he/she would want and claim the remaining amount.  
Pinnel sued Cole for the recovery of a debt. Cole owed money to Pinnel £8 10s. Pinnel then asked Cole to pay £5 2s 6d in cancellation for all debt. When Cole paid, Pinnel sued for the remaining amount.
The court held that Pinnel was right in suing for the remaining amount since their agreement for the payment of the lesser sum for the settlement of the entire debt was not supported by a good consideration.
In contract law, consideration is a third element after offer, acceptance, and intention to be legally bound. In English law, gratuitous promises would never acquire the force of law unless made under the deed. Therefore, any promise to give something for free without receiving as return benefit will be non-binding to either of the parties. This law does not apply to agreements that are in writing and affirmed by witnesses (deeds). All other agreements must be supported by consideration to become legally binding. Consideration is sometimes difficult to define. The decision in Currie v Misa defined consideration as “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given suffered or undertaken by the other party’. What this definition means is that consideration is a loss or a benefit that one party receives for doing or refraining to do something. An elaborative definition was given by the court in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd as a price that one party buys the promise or action from the other party. Therefore, where one party takes a lesser sum to forfeit the entire debt, that party would not receive any benefit. In confirmation of this principle of Pinnel’s case, the ruling on Foakes v Beer affirmed the same where the court ordered that Mrs. Beer had legal entitled on recovery of interests earned on Dr. Foakes’ debt despite having said that she won’t ask for it.
The exception of the Pinnel’s case
A few exceptions exist on the legal principles set in Pinnel’s case. These principles include composition agreement where multiple creditors accept to set the debtor free for a lesser sum. The second exception is where the lesser sum is paid by a third party in forfeiture of the entire debt.  The third exception is where the creditor accepts a consideration in exchange for the entire debts. Lastly, cases of promissory estoppel.
(i) Composition agreement from Creditors
Where the debt was owed to a group creditor, and all these creditors agree to take a lesser sum, the court will not allow any of the creditors to follow the remaining debt. For instance, in Good v Cheesman any debtor who cannot manage to pay his creditors all the debt, but can manage to convince them to accept a lesser sum, the debtors would be estopped from recovering the remaining sum for the prevention of fraud.
(ii) Payment by a third party
If the creditor accepts to take a lesser sum from a third party to cancel all the debt from his/her debtor, the law will not allow him/her to claim the remaining sum from the debtor. For instance, in Hirachand Punamchand v Temple, the court held that as far as the payment of the lesser sum was paid by the father, and the claimants accepted it to discharge the remaining balance from the son, the amount served as sufficient consideration could no longer ask more money either from the son or the father.
(iii) Fresh consideration
Fresh consideration can be anything as far as the debtor accepts. Examples of fresh consideration can be payment of the lesser sum at another different location for the benefit of the creditor, less sum at an earlier time before the load is due, or a different item. This rationale was once held in Vanbergen V St Edmunds Properties Ltd where the court held that a variation contract to change performance for the benefit of the debtor is not a valid consideration unless when it is for the benefit of the creditor. 
(iv) Promissory estoppel
An agreement to take lesser sum for the cancellation of all debt could be enforceable in equity. Promissory estoppel is a principle in equity which ensures that both parties to contract are fair to each other. If one party promises to forgo the debt for a lesser some, and then the other party in reliance with that promise undertake some actions, equity will prevent the promissor from dishonoring the promise to save the promisee from incurring a loss. However, the promisee must prove reliance on the promissor statement and action on the reliance of that statement. For instance, in Central London Property Trust Ltd v High Trees House Ltd the court estopped the claimant from recovering the rent for the years when there was war since he was the one who promised the claimant that he would reduce the rent.
Marsh, PDV, Comparative Contract Law: Cases, Materials and Exercises (Gower, 2017)
Miller, Roger LeRoy and Gaylord A Jentz, Cengage Advantage Books: Fundamentals of Business Law: Excerpted Cases (Cengage Learning, 2nd ed, 2009)
Poole, Jill, Casebook on Contract Law (OUP Oxford, 11th ed, 2012)
Stone, Richard, James Devenney and Ralph Cunnington, Text, Cases and Materials on Contract Law (Routledge, 2011)
Wilson, Steve and Phillip Kenny, The Law Student’s Handbook (OUP Oxford, 2nd ed, 2010)
Adam v Lindsell (1818) 1 B & Ald 681
Brinkibon Ltd v Stahag Stahl (1983) 2 AC 34
Byrne & Co v Leon Van Tien Hoven & Co 5 CPD 344
Currie v Misa (1875) 2 LR 10 Ex 153
Dickinson v Dodds (1876) 2 Ch. D. 463
Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] ‎UKHL 1; AC 847
Entores v Miles Far East Corp (1955) 2 QB 327
Good v Cheesman (1831) 2 B. & Ad. 328
Hochster v De la Tour (1853) 2 E & B 678
Robinson v Harman (1848) 1 Ex Rep 850
Routledge v Grant (1828) 4 Bing 653; 130 ER 920
Vanbergen v St Edmund Properties Ltd (1993) 2 K.B. 223.

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