Economics of Contract Law

Question 1: If a contract is silent as to the sum to be paid by the employer to the contractor for the works, the law implies into the contract an obligation on the employer to pay a reasonable price for the works carried out. Drawing on examples from standard form contracts, highlight how express terms have been used to give effect to and/or modify the assessment of the reasonable price the law would, in the absence of express terms as to the sum payable, require the employer to pay. Question 2: It was in the nineteenth century first and foremost that a philosophy of freedom of contract was established. Embedded in this philosophy was not only the freedom to enter into and negotiate the terms of contract, but also the right of the parties to determine the levels of compensation payable in the event of a breach'. Evaluate the extent to which this approach is, today, reflected in the ability of a party to impose penalties on the other party in the event of a breach of contract. Question 3: Ethel, a property developer, decided to build a house (the house) for herself and her family. She wanted the house to be modern in design and built largely of reinforced concrete and glass. She also wanted the house to provide a place in which she could display her valuable collection of paintings throughout. The Dominant Cause Partnership (DCP) is a leading firm of architects that specialise in the construction of such dwellings. At a meeting with Ahmed, a senior partner in DCP, Ethel described the nature of her painting collection. She explained that her paintings would be damaged by sunlight and that, if she were to go ahead with the project, it was vitally important to her that the glass walls of the house should protect the paintings from sunlight. Ahmed assured her that modern glass-making technology would offer her paintings the protection needed. Ethel then entered into a contract with DCP for the design of the house. DCP produced a design, detailed drawings and technical specifications for the house. DCPs involvement in the project ended at that point and Ethel paid DCPs bill. She then took over the management of the construction of the house herself. Ethel ordered materials and engaged a building company, which constructed the house. Both the construction of the house and the materials ordered were in strict compliance with DCPs drawings and specifications. Once the glass had been fitted Ethel soon discovered that it possessed none of the light-protecting qualities required. Upon investigation, it was discovered that whilst the glass conformed to the specification ordered by Ethel and specified by DCP, DCPs specification for the glass was incorrect. It is estimated that the cost of replacing the glass will increase the building cost of the house from 1,000,000 to 1,500,000. The value of Ethels paintings is estimated at 750,000. 1.Advise Ethel on any claims that she may have against DCP in breach of contract. 2. Advise Ethel on the damages she may recover if she is successful; include in your advice the principles the court will use when deciding whether to award substantial damages in respect of breach of contract. Answers: 1: Contract means a lawfully enforceable agreement between at least two parties based upon some terms and conditions depending upon which the parties to the contract performs their obligation as to each other in relation to the terms of the contract (Meyer, 2010). The validity of a contract depends upon its essentials, these are mandatory for the purpose of constructing a valid legal contract. The essentials of a contract are as follows: 1. The parties to the contract must have attained the age of maturity at the time of entering into the contract.2. The free consent of the parties to the contract is mandatory for the purpose of forming a valid contract.3. The parties to the contract must be of sound mind and they are enough capable for understanding the terms and conditions as well as the consequences of the contract.4. The subject matter of the contract must not be illegal in nature and any terms or conditions of the contract must not contravene any provision of any law in force (Suez environment awarded contract in UAE, 2008).5. Another most important essential factor of a valid contract is consideration, without consideration no valid contract can be formed (Frey and Frey, 2001).Here, in the mentioned circumstances the sum which is to be paid by the employer to the contractor is not given but the obligation from the part of the contractor is implicated in an implied manner. But according to the provisions of the law of contracts in United Arab Emirates, any contract without consideration of either party is void and shall not have any legal enforceability as well as the binding force of law (Fattal and Schutz, 2008). Consideration is what a party to the contract receives in against of performing his part of obligation in the course of the contract. The consideration of a contract may be or may not be calculated in the economic form or any other kind. Consideration is a promise to do anything or to abstain from doing anything, which may or may not have any financial relation (Elliott and Quinn, 2007). For example if A and B enters into a contract and A says to be if B gives his pen to A, he will never talk to Bs wife C anymore. Here, As consideration is the pencil and Bs consideration is the promise made by A that he will never talk to Bs wife C. So it is not necessary that the consideration of a contract must be financial in nature, rather it is a promise to perform any particular act which may be in relation to the economic factor or may not. Without consideration if any contract is formed then that will be a void contract and if the consideration from either party is not mentioned properly then it would be difficult to determine the part of consideration in enforceability of the contract (Richards, 2006). In the famous case of Browning Vs Johnson, the Ld Court has observed that the forbearance of a lawful right of either party to the contract is a valid consideration for the other party of the contract subject to the consent of the parties. The court also held that a promise to surrender a lawful right from the part of either of the parties to the contract is a valid consideration for the other party to the contract. Subsequently, consideration need not to be adequate or parallel to the comparative value, but it is sufficient that either of the party to the contract made promise to do anything or abstain from doing anything against the performance of the other party in the course of the contract (Hillman, 1997).According to the Article 267 of the United Arab Emirates Civil Code independent annihilation of a contract cannot have any legal effect in the United Arab Emirates, however the observation of the Courts in United Arab Emirates demonstrate that the employer in construction cases be able to be permitted to unilaterally conclude a contract, subject to some exceptions. In a current Appeal judgment in a court with competent jurisdiction, it was observed that the grounds behind this exemption are that muqawala type of contracts often takes an extended period of time to conclude and situation may transform in the period connecting formation of contract and completion of the work of the contract. This exemption has its pedigree in Egyptian law (Bechor, 2007). In this case, the court observed that when a chief contractor provides notice of annihilation to the subcontractor, the contract of muqawala terminates and the chief contractor have to pay compensation the subcontractor for the expenditures incurred, any work previously performed and defeat of profit which is expected by the subcontractor to earn by taking responsibilities of the work (Company, 2015). The main reason behind the concept of reasonable price is that no one should be deprived of what he is entitled. If any party to the contract performs his part of obligation then he is entitled to get his consideration, in the mentioned circumstances in the question, the actual amount of consideration was not mentioned but there was something which could have been taken in account as consideration though it was not specific for that purpose the principal of reasonable price applies. In the case of Baird Textile Holdings Ltd v MS plc, it was observed by the Ld. Court that if the price is uncertain the terms of the contract then the either of the party give terminate the contract by serving a notice of termination but if either of the party has already performed his obligation then the other party have to perform his part of duty in the course of the contract, if it is uncertain then the principal of reasonable price may be applied (McKendrick, 2007). In the case of Scammell and Nephew Ltd v Ouston, it was held by the Ld. Court that if the actual quantity of consideration is not mentioned in the terms of the contract then it is not possible for the courts to determine the actual reasonable price in relation to the consideration as it depends upon various factors like market, conditions, quality of work and most importantly the kind of performance, whether it is performed in accordance with the terms of the contract or not (Christ water technology subsidiary awarded UAE contract, 2007). 2: In this regard it should be mentioned that in case of a breach of contract penalty was the only remedy in the nineteenth century, but in present scenario this concept has changed a lot. Nowadays, in case of a breach of contract by either party to the contract there are three possible way in relation to the remedy. These are, (i) Compensation or damages, (ii) Specific performance, and (iii) Injunction. As per the information provided in the context of the question a party to the contract was not only empowered to negotiate the terms of the contract but also impose penalties upon the other party in case of a breach of contract (Knight and Satchell, 2007). The level of penalty was also determined by the aggrieved party of the contract. But in present legal scenario things changed to a very far extend, now any person may enter into a valid contract subject to the competency of the person, may also negotiate the terms and conditions of the contract but if there is any breach of contract t hen the for the purpose of complying appropriate remedy the aggrieved party have to approach to the court of law with competent jurisdiction (Carter, 2012). Only the court of law has the power to impose penalty upon the other party to the contract or to give decree in favor of any other form of remedy which is available in the course of such breach of contract. Whether there is any scope for imposing penalty or not that also is determined by the concern court with competent jurisdiction. These issues are generally decided by the court depending upon various factors in accordance with the terms of the contract as well as the law of contract of the country. For example, if in case of breach of contract, where chances of specific performance is more possible than imposing penalty, then the court of law with competent jurisdiction may give a decree in favor of specific performance of the contract but if there is no scope for specific performance or if it is done it would not serve the l oss of the aggrieved party then the court may impose penalty upon the defendant. Here the aggrieved party is not authorized to take any action in relation to imposing penalty by himself; the court of law will award it, if the court thinks fit and proper. For illustration, A and B entered into a contract, where A has paid a sum of money to B and B was obliged to construct a building in the adjacent land of the house of A but B has not constructed the building, here the scope of specific performance is very much available, so B may be compelled to perform his duty unless he have to pay compensation along with the sum of money received in this regard, to A. From the nineteenth century till today, the concept of penalties in case of breach of contract has changed a lot. Now the term penalty has became more adequate in the legal field in the name of damages. The process of determining the penalty is also changed as per the development of the legal surroundings. Damages are determined by two forms which are; liquidated damages and un-liquidated damages. Liquidated damages is a form of damages where the actual loss suffered by the aggrieved party because of the breach of contract can be calculated and depending upon which penalty can be imposed, for example A and B entered into a contract, where A gave a sum of 1000 $ to B and asked to construct a building adjacent to the house of A, and also promised to pay the balance amount of money which is 1500$ after completing the construction, but after the construction has been complete, A refuses to pay the balance amount of money to B, here the loss suffered by B is specific and can be easily cal culated, so it falls within the within the purview of the concept of liquidated damages. But if in the same case the amount of money was not specified and the cost of construction made by B, was not recorded then it would not be possible for the court to determine the actual amount of loss suffered by B in this regard, so the court may impose a lump sum amount of damages in favor of B, this will fall under the concept un-liquidated damages as it was not able to calculate the actual amount of loss suffered by the aggrieved party (Cohen and McKendrick, 2005). In a famous English case ofHillas Co Ltd v Arcos Ltd, the house of lord observed that in breach of contract if the specification of the kind of breach and loss suffered by the aggrieved party is sufficient then the court of law may grant compensation upon the defendant in a specific way and the amount of compensation would be very much adequate in accordance with the breach as well as the terms and conditions of the contract. In the case of Carlton Communications and Granada Media plc v The Football League, the court of law with competent jurisdiction held that compensation is a right of the aggrieved party in case of a breach in course of a contract but if there is sufficient and justified ground of such breach of contract from the part of the defendant of suit then the amount of compensation may be waived and if it breach happened due to any natural disaster then neither of the parties to the contract shall be liable for any sought of penalty. In the case of Hadley v Baxendale, the court of law held that the aggrieved party to a breach of contract is entitled to get back the losses suffered due to the breach but any loss of anticipated income or gain is not permissible to be reimbursed from the defendant due to the breach of contract and the amount of damages shall be calculated depending upon the actual loss suffered by the aggrieved party (Grundmann, 2007). In the present legal scenario, the right of the aggrieved party has been changed to some extend especially as to rights in case of a breach of contract. Previously in the nineteenth century the parties to the contract has the right not only to enter into the contract and negotiate the terms of the contract but also to determine the level of compensation in case of the breach of contract (Fattal and Schutz, 2008). But in present legal scenario things have been changed, the court of law with competent jurisdiction has the authority to determine the level of compensation in case of a breach of contract (Beale and Tallon, 2002). Not only that whether there is any scope for the imposition of penalty is available or not or any other form of remedy is available to the aggrieved party or not, shall also determined by the court of law with competent jurisdiction. If the court of law things fit and proper then only the decree relating to the compensation shall be given and the form of damages shall also be determined by the court of law by applying its discretionary power (Fitzpatrick, 2004). In present society the scope of contract law has been noticeably increased in comparison to the nineteenth century, many cases are disposed depending upon the discretion of the court of law as every case is different every aspect is dissimilar and the region of contract law has been tremendously improved. In the case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd, the house of lord held that in case of a breach of contract the parties to the contract are at a liberty to solve the dispute by way of negotiating the terms of the contract or any other form of alternative dispute resolution but neither of the party has the right to impose the level of compensation upon the other party of the contract, if it does then it will not bear the binding force of law, for that purpose the aggrieved party have to approach the court of law with competent jurisdiction (Geest, 2011). From the above discussion it can be concluded that since the period of nineteenth century there has been a lot of changes arrived in scope of contract law. Many great judgments have been given by the court of law with competent jurisdiction and many great doctrines have been also evolved in relation to the concept of contract law and various contractual aspects. In spite of these alteration and changes the basic structure of the contract law remains the same as it was it the earlier period of time (Beale, 2010). In future it is very much possible that a lot more changes to the concept of agreements and contracts is going to be changed but the fundamental requirements and structure of the law of contract would be similar to that of it is in present (Stone and Cunnington, 2007). 3 (a): Under the mentioned circumstances, Ethel has the right to sue the Dominant Cause Partnership (DCP), as in the course of the contract formed between Ethel and the Dominant Cause Partnership, it was mentioned by Ethel that what kind of glasses she need for the purpose of protecting her paintings and she also talk about the nature of her painting and the kind of exhibition she would like to made. The representative of the company DCP assured Ethel that they will make the in such a manner that there shall be no scope for any damage to her painting by way of sunlight as they will specify superior quality of modern glasses which will offer her paintings a greater perspective as to protection from sunlight, but the company DCP has not complied their obligation in this regard as after constructing the house Ethel realize that the they specified was not up to the mark and it was not matching such quality as per the description made by the representative of DCP, they has prescribed some other kind of glass material dissimilar to her requirement and the term of the contract. For that purpose Ethel could have suffer from the loss of damage to her valuable paintings apart from that though the paintings has not been damaged yet before that it came to the knowledge of Ethel, but the DCP has violated the condition of the contract as well as Ethel have to bear the cost of change the fitted glass prescribed by the DCP. Hence, the liability lies upon the company that is Dominant Causes Partners. Because of their misconduct Ethel have to incur an additional expense for the purpose of changing the glass. So, Ethel has the right to reimburse all the expenditures in relation to change the wall glasses prescribed by the DCP. Though the cost of changing the glasses is higher than the actual cost of the paintings but in course of the contract there were nothing mentioned regarding the painting except the factors which may damage the painting and the protection of the painting that is the quality glasses for wall, which were the main subject matter of the breach of contract (Ellinghaus, 2007). For that purpose DCP have to bear the expenses in relation to change the wrong glasses which were fitted due to misconduct from the part of the DCP. If DCP have perfectly discharged his duty in the course of the contract in issue then Ethel would not have to change the glasses as well as the terms of the contract woul d not have been violated. In the case of Koufos v Czarnikow LtdorThe Heron II, it was observed by the Ld. Court that the plaintiff is entitled to get all the loss suffered due to the breach of contract or due to the negligence from the part of the defendant or due to any misconduct from the part of the defendant in the course of the contract, but loss of any anticipatory income is not permitted to be reimbursed by the plaintiff (Poole, 2006). 3 (b): Under the mentioned circumstances, Ethel is entitled to get compensation from the Dominant Causes Partners (DCP), as the company DCP has violated the right of Ethel in the course of the contract, not only that the company DCP has not performed their duty with due diligence in accordance with the terms of the contract for that reason Ethel not only have to incur the expenses for changing the glasses she has harassed, her legal right has been infringed and there was a possibility of causing damage to her painting. Because of that DCP is liable not only to pay the amount of loss in relation to change the glasses but also to pay damages in this regard. Generally in a situation like this the court awards liquidated damages as the cost of changing the glasses are estimated as well as if the painting would have been damaged the cost of which is also calculable, so, there is maximum possibility of awarding liquidated damages in this regard. In the case of Jackson v Royal Bank of Scotland, th e court of law with competent jurisdiction has observed that if the legal right of any party to a contract is violated in the course of the contract then the other party who is responsible for such violation is responsible to pay compensation to the aggrieved party of the contract in issue along with all the loss suffered by the aggrieved party (Kovac, 2011; Lexology.com, 2015). In the case of Williams v Roffey Bros, it was observed by the court of law, that in case of a breach of contact if the right of either of the party is infringed by the other party in relation to the contract then the aggrieved party is entitled to be compensated by the party to the contract who has infringed such right whether deliberately or not, but if the right has been infringed due to any natural consequences and the things were beyond control of the parties to the contract then neither of the party is liable for payment of any sought of damages (Williams v Roffey Bros, [1990]). 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