THE MOMENT OF RESPONSIBILITY: LAW AND PRACTICE
In the last chapter, it became evident that the exact moment an offer and an acceptance occur is not always clear, as the parties often proceed slowly towards contractual responsibility. In this chapter we move on to look at the problems caused when negotiating and contracting parties do not behave in the ways that the courts expect them to. It is clear from a range of empirical studies of the use of contract law within the business community that rather than being the exception, non-compliance with the law of contract is the norm. In this chapter, I draw attention to a series of circumstances in which the expectations of the business community and the expectations of lawyers are clearly in opposition. These include problems relating to the ‘battle of the forms’ lack of certainty, tenders, reasonable reliance and legitimate expectation; and performance during the course of the contract. It could be argued that these various case studies are more than just discrete problems at the margins of the modern development of the law of contract. Rather, they could be seen as central to suggestions that the neo-classical model of contract is lacking in legitimacy amongst the business community. One of the difficulties facing the judiciary is whether it should prescribe what the parties need to do in order for a contract to be enforceable or merely enforce what seems to be standard business practice.
THE BATTLE OF THE FORMS
In their influential study of contracts between businessmen in the engineering industry, Beale and Dugdale (1975) found that the majority of firms used standard forms when negotiating contracts. These tended to have the primary obligations such as price, item, delivery date and terms of payment typed on the front and a number of standard conditions relating to contingencies on the back. Where two businesses were roughly equal in terms of their bargaining power, each party attempted to get its ‘back of order’ conditions accepted by the other party. The result was a battle as to whose terms and conditions take priority. This provides us with an excellent example of how practice in the business sector differs from the judicial expectations of pre-contractual negotiations. The result in many cases is that no contract exists. Whilst the parties may appear to have agreed, in reality they are ‘separated’ by the express wording of the documents they exchange.
The facts of Butler Machine Tool Co Ltd v Ex-Cell-O Corporation Ltd (1979) illustrate how communications can give rise to such a battle. This was a case in which the Court of Appeal rather unconvincingly used the rules relating to counter offer (see Chapter 6) to solve a complex practical problem. The facts are illustrated in pictorial form in Figure 7.1. In this case, the quotation and acknowledgment prepared by the sellers referred to one set of conditions and the order to another prepared by the buyers. Each contained terms which differed significantly from the other. On whose terms, if anyone’s, was the contract made? The court held that the seller’s quotation
(2) was an offer, the buyer’s order (3) a counter offer, and the seller’s return of the acknowledgement slip (4) an acceptance of the buyer’s counter offer. The contract was therefore made on the buyer’s terms. The significance of this finding was that, although the price quoted by Butler was £75,500, their terms contained a ‘price-escalation’ clause under which Ex-Cell-O was required to pay at prices at the date of delivery. The buyer’s terms contained no such clause. When Butler tried to invoke the clause, claiming a further £3,000, a dispute arose, resulting in Butler’s eventual failure in the Court of Appeal.
It has been argued that, by ignoring the seller’s covering letter (4), the Court’s rationale is unconvincing. It seems clear that the sellers did intend to re-import their terms and conditions into the bargain. If the letter had been taken to be another counter offer, it could be said that, when the buyers took delivery (5), it constituted acceptance of it by conduct. The result of this alternative analysis would be that the seller’s, rather than the buyer’s terms would have prevailed. The possibilities are numerous, but what is clear is that there was no agreement of the kind anticipated in classical doctrine. Possibly there was no agreement at all.
The case reveals the limitations of an overly formal approach to contract formation and the difficulties that such an approach has in coming to terms with everyday business practices which do not fall neatly into the classical paradigm. The parties clearly wanted and intended to enter into a commercial relationship with each other, but the notion that they were fully attuned to every detail of their legal commitment is clearly a falsehood. Rather than solving the problem of the battle of the forms, the case could be said to create an additional one by encouraging people in similar situations to keep on sending their own standard forms with each communication in the hope that they would send the ‘last shot’. Whilst the majority in the Court of Appeal were persuaded that the transaction could be analysed according to the rules of offer and acceptance, the case provided Lord Denning with another opportunity to argue that traditional analysis of such situations was overly formulaic and out of date. Convinced that the parties had concluded a contract, he argued, in line with his reasoning in Gibson, for a more holistic approach to contract formation in which the court played a proactive role in determining the contents of the deal. Where there are differences in the standard conditions of each party that are irreconcilable, then he suggested that the conflicting terms should be scrapped and replaced by a reasonable implication.
The ‘hit or miss’ nature of the traditional approach to contract formation is borne out in subsequent cases. In British Road Services v Arthur Crutchley Ltd (1968), British Road Services (BRS) delivered a large consignment of whisky to Crutchley’s warehouse. The driver handed Crutchley a delivery note which incorporated BRS conditions of carriage. The note was stamped by Crutchley, ‘Received under Crutchley’ sconditions’. The court held that this amounted to a counter offer, which BRS accepted when handing over the whisky. The contract was therefore concluded on Crutchley’s terms.
It is clear that some of the reasoning in leading cases is different to reconcile. In Cie de Commerce et Commission SARL v Parkinson Stove Co Ltd (1953), Parkinson sent an order to Cie for a quantity of steel sheets on a printed form containing the following provision reproduced in Box 7.1. Cie omitted to sign and return the acknowledgement slip attached to the form, but on receipt of the order replied to Parkinson: ‘We acknowledge receipt of … your order No. K. 4851 dated March 5, which we received today and for which we thank you’. Subsequent correspondence left no doubt that the parties regarded themselves as bound, but when Parkinson cancelled the order and Cie sued for breach, Parkinson claimed that there was no concluded contract because of Cie’s failure to return the acknowledgement slip. In the alternative, they argued that Cie’s letter of acknowledgement could not be construed as a sufficient acceptance of Parkinson’s offer. Neither argument found favour at first instance, but the Court of Appeal held that there was no concluded contract and, accordingly, that Cie were not entitled to damages. It was felt that Cie’s letter of acknowledgement, which did not strictly adhere to the terms of the offer, did not amount to an acceptance of the order. However, it has been noted that it is difficult to envisage how they could have more clearly indicated their acceptance of the order, short of returning the acknowledgement slip itself.
‘This order constitutes an offer on the part of Parkinson on the terms and conditions and at the prices stated herein and to constitute a binding contract on Parkinson, said offer must be accepted by execution of the acknowledgement in the form attached by Cie, it being expressly understood that no other form of acceptance, verbal or written, will be valid or binding on Parkinson.’
The eventual decision is scarcely an illustration of what Pilcher J, in the court of first instance, referred to as the tendency of the courts ‘always [to] lean towards giving legal effect to documents which the parties themselves regard as constituting a binding contract in law’.
PERFORMANCE DURING FORMATION OF THE CONTRACT
Similar sorts of dilemmas arise in cases where the parties start to do what they have undertaken to do before a contract has been formed. The general rule is that, once performance starts, then a contract should be recognised. The problem is in determining the terms on which an agreement has been reached. It is important to stress from the start that it is far from uncommon practice for the parties to start performance early. Indeed, this often makes good business sense. Pressures of time, the need to meet targets, efficient use of labour and fear of market fluctuations all mean that this could be seen as sound commercial practice rather than lack of patience. Moreover, empirical studies of business practice suggest that a number of informal practices often exist within industries to protect those who start to perform without the safety net of a valid contract. These include loss of respect and a diminishing of trust in those who ‘welsh’ on a deal. Despite this, the problem remains a live issue for the judiciary. On the one hand, they are eager for the law to reflect efficient commercial practices, on the other, a number clearly feel constrained by the expectation that they should look for a particular sequence of events which anticipates that formation of the contract will be complete before performance begins.
Difficulties over performance prior to completion of negotiations occur in a number of settings, but debate around ‘letters of intent’ provides a good example of a practice which has caused problems for neo-classical models of analysis. A letter of intent, sometimes called ‘an instruction to proceed’, states that the sender intends to enter into a contract with the addressee. This is a common device in the construction industry where business people regularly rely on such letters. On their true interpretation, letters of intent probably create no contractual obligation which would be recognised in English law. But where they include an instruction to proceed with performance and such performance has begun, the courts have been prepared to allow that, when the contract is eventually agreed, it will have retrospective effect.
This practice was extensively discussed in the case of Trollope and Colls Ltd v Atomic Power Construction Ltd (1962). The facts were that in February 1959 Atomic Power received a tender for civil engineering work in the construction of a nuclear power station from Trollope and Colls. The tender was for a lump-sum price and incorporated conditions authorising variations in the form, quality or quantity of work. It provided that such variations were to be taken into account in ascertaining the contract price. The tender further incorporated a fluctuation clause relating to labour and material costs. Considerable changes were made after the date of tender, necessitating amendment of drawings, specification and quantities. Trollope and Colls were notified of these changes and in June 1959 they were asked to start work by a ‘letter of intent’ from Atomic Power which stated: ‘We have to inform you that it is our intention to enter into a contract with you for [the works]. As soon as matters outstanding between us are settled we will enter into a contract agreement with you, and in the meantime please accept this letter as an instruction to proceed with the work necessary to permit you to meet the agreed programme’. Work began and on 11 April 1960, by which time all outstanding matters had been agreed but no contract had been signed, a dispute arose over the basis on which Trollope and Colls should be paid for the work they undertook before 11 April.
Trollope and Colls contended that they should be paid on a quantum meruit basis for the work carried out before that date. Quantum meruit is a quasi-contractual remedy which allows payment to be made for the value of the work done where there is no formal contract. Atomic Power argued that the tender as adjusted outlined how payment should be assessed. It was held that the parties having acted in the course of negotiations on the understanding that, if and when a contract were made, it would govern what was being done meanwhile, the contract which came into existence on 11 April 1960 governed the rights of the parties as to prior work. This approach was said to be justified on either of two grounds. First, a stipulation necessary for the business efficacy of the contract, that the variations clauses should apply retrospectively could be implied. Second, that the tender constituted an offer that contemplated variation of the work. Acceptance of that offer was taken to be an acceptance of the offer which embraced the changes requested and that these had been agreed in anticipation of the ultimate acceptance. Megaw J concluded that there is ‘no principle of English law which provides that a contract cannot in any circumstances have retrospective effect’.
A similar situation arose in the case of Trentham Ltd v Archital Luxfer Ltd (1993) but, in this dispute, complete performance took place before a contract had been formed. Here, Trentham were engaged by a client to design and build industrial units. Trentham entered into negotiations with Archital Luxfer to supply and install aluminium windows. This work was completed and paid for, but Trentham sued Archital Luxor for alleged defects in the windows, after they were sued by their client for delays and defects. Archital denied the existence of any contract. Whilst no written contract had come into existence, Trentham claimed that a binding contract was nevertheless formed on the basis of written exchanges, oral discussions and the performance of the transaction by both parties.
According to Steyn’s leading judgment in the Court of Appeal, this was a contract which could not ‘be precisely analysed in terms of offer and acceptance’. He based this decision on the following points. First, he argued that English law adopts an objective approach to contract formation in which ‘the governing criterion is in the reasonable expectations of [in this case] … sensible business people’. Relying on Gibson, he further argued that, although the coincidence of offer and acceptance is the normal mechanism of contract formation, ‘it is not necessarily so in the case of a contract alleged to have come into existence during and as a result of performance’. Following the line of reasoning in Trollope, he suggested that, if a contract only comes into existence during and as a result of performance of the transaction, it will frequently be possible to hold that the contract impliedly and retrospectively covers pre-contractual performance.
The ability of the neo-classical model to provide a remedy in such cases has been challenged even further in a set of cases in which performance occurred but negotiations did not result in a contract. The fact that a contract has not been finalised clearly hampers the court in applying contractual remedies. However, the courts have shown themselves willing to entertain restitutionary or ‘quasi-contract’ claims based on the notion of unjust enrichment in these situations. The idea is that natural justice and equity require those who have received a benefit to pay for the value of the work on the quantum meruit basis discussed above; see Peter Lind & Co Ltd v Mersey Docks and Harbour Board (1972).
This solution to the absence of a contract and contractual remedies arose in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd