Principles of Contract Formation

Discuss about the Contract for Rigby Corporate Function Planners Pty Ltd.

Memorandum of Advice

To

Samantha

Subject: Is there a contract between the Event Management Limited (EML) and Rigby Corporate Function Planners Pty Ltd. (RCFP)

Respected Madam,

In this case, it has been observed that you are engaged in a business acquisition company. This company works to take over other companies and enhance their businesses in this way. Considering the matters of fact in this case, it has been observed one pre-contractual negotiation has been done with Rigby Corporate Function Planners Pty Ltd. (RCFP). It can be seen that the company where you are working has done many steps to bring all the negotiations into reality. A number of steps have been taken. The parties have agreed the purchased price of the company and it was decided that the owner and managing director of the RCFP would be posted in a consultative role after the completion of acquisition process. Further, the date of business transition has been fixed. However, after certain times, the following company was denied to continue the business by stating that they are not interest anymore to let Event Management Limited take over their company.

The main issue of this case is to determine whether any contract has been made in between both the companies or not. 

Your case is based on the principle of contract formation and construction and therefore, it is important to look over all the aspects of contract. A contract is an agreement by which any party on certain consideration has made certain promises and other party accepts the terms of the promise. The terms and conditions of the contract are imposed on the parties mandatorily and any of the parties will face legal provisions in case of making any breach. A contract could be formed if the following elements are followed. The elements are agreement, consideration, capacity of the parties, legal nature of the contract, intention of the parties and forms of contract. It is important to state about the principle of contract formation to come into conclusion regarding the facts of the case. In this case, it has been observed that certain preliminary agreement has been formed in between the parties regarding the acquisition of a company and a framework has been provided to the parties to negotiate over the pre-contractual conduct. The nature of the preliminary agreement is binding. The main intention of this agreement is to avoid all kinds of risks regarding the contract where both the parties to the contract have an intention to enter into a contract. The preliminary contracts are to certain extent regarded as “subject to contract”. Certain tests have been prescribed in the case of Masters v Cameron[1].  There are many cases where before the final contract, certain negotiating terms have been made in between the parties in the writing format and the legal nature of the negotiating terms is based on three conditions such as:

• Where the parties to the contract have made all the terms regarding their consideration and they have an intention to be bound by the terms of the negotiation;
• Where the parties have no intention to depart from or make any addition regarding the express or implied terms of the agreement and nevertheless made performance of any condition upon the execution of formal document;
• Where the parties to the contract has no intention to conclude the bargaining process before execution of formal contract

Negotiating Terms

According to the contractual interpretation of this case, it has been decided  that first two of the conditions have legal perception and the last condition has no legal views in the eye of law and the parties to such contract will not legally bound[2]. The High Court in this case has decreed that preliminary agreement caused an assumption regarding the formation of a contract and not legally binding contract itself. The parties to the preliminary agreement should have to show the common intention regarding the contractual subject and all the additional terms regarding pre-contractual statements should be decided mutually. However, there are certain exceptions too. According to Coal Cliff Collieries v Sijehama[3], if all the key commercial terms of the contract is quite clear to the parties and the agreement is capable of enforcement thereby, the nature of the agreement will be binding. Further, it has been decided in GR Securities P/L v Baulkham Hills Private Hospital P/L[4] that in case the intention of the parties is to bind by the contents of the agreement, the nature will be legal. Further, in Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2)[5] , it has been observed that the conduct and correspondence of the parties before and after the execution of the contract will be taken into consideration for making the preliminary contract legally enforceable. However, the general nature of the preliminary agreement is not legal, as fundamental pricing of the final contract are not mentioned usually.

There is another problem cropped up in this case. it is to be decided whether the negotiation conducted between the companies provide certainty for a court to conclude that a contract did existed or not. There are certain agreements where some incomplete contractual terms existed. According to the traditional view, an agreement will not be legally enforceable if the contractual terms are uncertain. However, this concept has been rejected in Danny Lions Ltd v Bristol Cars Ltd[6], where the court has decided that where the ventures of an agreement are quite reasonable and clear, the nature of the agreement will be legal in spite of other uncertainty present in the agreement. Further, in R & D Construction Group Limited v Hallam Land Management Limited[7], the court has explained that where the price of the contracted subject has been accepted between the parties, obligation regarding the price will be enforceable.

One of the basic principles of construction of contract is that the terms of the contract are required to be certain and this principle has been established in May and Butcher v The King[8]. Lord Denning, in F & G Sykes (Wessex) Ltd v. Fine Fare Ltd [9]states that reasonable terms of the contract has been implied in the contract to avoid all the uncertainties. The court will decide whether any legal offer and acceptance has been made between the parties or not. Further, intention of the parties will be required and the terms should be certain. A pre-contractual negotiation is sufficient for the court to decide the validity of a contract where all the terms of the agreement are certain and the parties have an intention to be bound legally through the contract. 

Offer and Acceptance

In this case, it has been observed that certain negotiations have been made in between the parties to the contract and the companies have decided certain things. However, it has also been observed that there are certain other matters that are remained unresolved. The date of transition of the company has been decided, but staff leave liabilities have not been mentioned properly in the pre-contractual agreement made by Event Management Ltd. further, no attempts have been made by the parties to confirm the mechanism for informing the parties of the Rigby Corporate Function Planners. A rough copy has been made by EML, which was not reviewed by the other company. According to Masters v Cameron’s case, it is to be decided that whether the subject matter of the case is legally binding or not. Considering the nature of the case, it can be stated that the parties have no intention to conclude the bargaining process, as many matters were unresolved that makes the terms of the contract uncertain. Considering the unresolved part of the contract, it can be stated that certain additional or substitution regarding the terms can be made. Therefore, it can be stated that no contract is made between the parties.

However, all the pre-contractual negotiation has been made through mail and there are certain requirements made for e-mail negotiation. Considering the case, it can be stated that acquisition price of the company has been agreed and the date has also been fixed. However, not all the terms of the contract were certain and that makes the nature of the agreement vague.

Conclusion:

It is therefore, advised to you that as no intention to be bound regarding the contract have been made by the owners or General Manager of Rigby Corporate Function Planners Pty Ltd, no contract has been formed in this case. Further, the subject matter of the agreement was uncertain, as there are some unresolved issues present and there was a chance to make amendment in the present agreement. However, the negotiation process has maintained certain essentials of the formation of contract and therefore, the court may order for the existence of contract between the parties. 

Reference:

Coal Cliff Collieries v Sijehama (1991) 24 NSWLR

Danny Lions Ltd v Bristol Cars Ltd (2014) EWHC 817

F & G Sykes (Wessex) Ltd v. Fine Fare Ltd [1967] 1

Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2) [2012] FCAFC 150

GR Securities P/L v Baulkham Hills Private Hospital P/L (1986) 40 NSWLR 631

Legal Aid Act 1978 (Vic)

Masters v Cameron (1954) 91 CLR 353

May and Butcher v The King [1934] 2 KB 17

Parker, David, and Gerald Box. Business Law for Business Students 2008. Lawbook Company, 2008.

R & D Construction Group Limited v Hallam Land Management Limited (2009) CSOH 128