Issues

The key issue raised in this case is whether Hot Engines Ltd is liable as per the contract formed with Snow White Laundry Ltd to pay the due amount? Whether Hot Engines has limited its liability in the contract to $2,000 by sending the company policy to Snow White Laundry Ltd?

When a legal contract is formed between two or more parties, they are bind by its terms. The parties of a contract are enforced to comply with its term or else they can face legal consequences. The contracting parties have the right to enforce the terms of the contract on another party to ensure that they did not violate such terms. However, not all contracts are legally enforceable, and the parties have the right to enforce those contracts which are valid (McKendrick, 2014). There are certain elements which are necessary to be present in order to determine whether or not a contract is considered as valid or not. These elements include agreement, intention to be legally bound and consideration. In order to form a valid agreement, the parties have to make an offer in which the offeror must have the intention to binding himself by the terms of the contact after the acceptance as given in Smith v Hughes (1871) LR 6 QB 597 case (CSU LAW504 Modules, 2013, Topic 6). Moreover, a valid acceptance must be given by the offeree which must be committed in order to be effective as provided in the case of Adams v Lindsell (1818) 106 ER 250. Moreover, the parties must have valid intention to bind each other in a legal contract.

A promise made by the husband to give a dress allowance to his wife was not considered as a valid contract because contracts which are formed on social and domestic situations are not valid as given in Cohen v Cohen (1929) 42 CLR 91 case. The parties of a contract must give each other something of value for agreeing to the contract which is referred as consideration. In case the terms of the contract are not fulfilled by the parties, then the aggrieved party has the right to demand damages for the loss suffered. The objective of paying damages is to compensate the party who suffered a loss due to non-fulfilment of the contractual terms. The court provided in Hadley v Baxendale (1854) 9 Exch 341 case that the damages which are too remote and not foreseeable cannot be recovered by the parties (CSU LAW504 Modules, 2013, Topic 8). The damages are categorised into two types which include liquidated and unliquidated. The liquidated damages are the ones that are determined by the parties while forming a contract and they are included as a clause in the contract. This difference was defined by Lord Dunedin in the judgement of Dunlop Pneumatic Tyre Company v New Garage & Motor Co [1915] AC 79 case. In this case, the court provided that liquidated damages are those which are defined in the contract (Turner, 2013).

Law

These damages are the actual loss which is suffered by the party due to violation of the contract. These are different from penalty clause which is included in the contract to deter another party from possible breach. A clause which provides that a penalty will be imposed on the contractual party for violating the terms of the contract is not considered as valid hence it is not enforceable by the law (CSU LAW504 Modules, 2013, Topic 8). The law did not allow parties to punish each other based on which the penalty clause which is included in the contract is considered as invalid. This was further established by the court in the case of Murray v Leisureplay Plc [2005] EWCA Civ 963. In this case, the court provided that imposing a fine on the employee to avoid him from leaving the job without serving a notice period is not considered as a penalty clause. The parties of a contract are only entitled to receive actual loss which they suffered due to violation of the contract (O’Sullivan, 2014). The court only allows the parties to recover their losses if they are able to genuinely estimate thereof. Another key element in the contract law is exclusion clause which is included by the parties in the contract in order to limit their liability which arises in case the contract is breached.

However, while implementing this clause, the parties have to comply with certain rules to ensure that this clause is valid. Firstly, the parties can incorporate the exclusion clause in the contract. The court provided in L’Estrange v Graucob [1934] 2 KB 394 case that the exclusion clause which is included in a written contract is valid even if it is not read by the parties of the contract (Monaghan & Monaghan, 2013). Secondly, the parties can express the exclusion clause; however, they have to take reasonable steps to ensure that the clause is brought into the attention of the other party. In Causer v Browne [1952] VLR 1 case, a dress was given by the claimant to the defendant for dry cleaning and a receipt was received by the claimant. Behind the receipt, it was written that the defendant would not be liable for any damage to clothes. The dress was damaged, and a suit was filed by the claimant (CSU LAW504 Modules, 2013, Topic 8). The defendant provided the argument that the liability is limited based on the exclusion clause, however, the court provided that the exclusion clause must be brought into the attention while the contract is being formed or before its formation.

In the given case study, a contract is constructed between Snow White Laundry Ltd (Snow White) and Hot Engines Ltd (Hot Engines) to repair a boiler. It was mentioned in the contract that if the boiler is not returned before 1 October, then Hot Engines will be liable to pay damages to the company to recover lost profit. Additionally, the company will be liable to pay $1,000 as additional payment each day. This term was included so that the company ensure compliance with this contract. Hot Engines failed to estimate the time taken for the repair, and the boiler was given five days late. A valid contract is formed between the parties based on essential elements of the contract; therefore, Snow White has the right to recover damages from Hot Engines for the liquidated loss. As given in Dunlop Pneumatic Tyre Company v New Garage & Motor Co case, parties have the right to recover their money for liquidated loss. Thus, Hot Engines is liable to pay $5,000 as per day average profit loss and $4,000 in addition for the loss of profit due to cancellation of special contract. However, the additional $1,000 per day payment to ensure that Hot Engines comply with the contractual terms is a penalty clause.

The objective of this clause is to penalise the company for breaching the contractual terms based on which this clause is not enforceable as given in the judgement of Murray v Leisureplay Plc case. Moreover, the letter sent by Hot Engines in which the company’s policy was included which describes that its penalty is limited to $2,000 is considered as an exclusion clause. The corporation wanted to rely on this term to limit its liability to $2,000; however, it has failed to comply with the rules of incorporating exclusion clause. The clause was not included by the parties into the written contract (L’Estrange v Graucob). Hot Engines also failed to take reasonable steps to bring the contract into the attention of Snow White before or while the contract was constructed between the parties (Causer v Browne). Therefore, the company cannot rely on this exclusion clause in order to limit its liability to $2,000 as given in the company policy. The liability of Hot Engines towards Snow White includes payment of $5,000 per day as loss in average profits and loss of $4,000 as additional profits due to cancellation of the contract.

Conclusion

Based on the above observations, it can be concluded that a valid contract has formed between the parties based on which Snow White has the right to recover liquidated losses which are suffered by the company due to breach of contract by Hot Engines. However, the company cannot recover additional $1,000 which is imposed as a penalty clause on violation of contract. Hot Engines cannot rely on the exclusion clause since it is not valid because it was not included in the written contract by the parties and it was not brought into the attention of Snow White.

References

Adams v Lindsell (1818) 106 ER 250

Causer v Browne [1952] VLR 1

Cohen v Cohen (1929) 42 CLR 91

CSU LAW504 Modules, 2013, Topic 8

Dunlop Pneumatic Tyre Company v New Garage & Motor Co [1915] AC 79

Hadley v Baxendale (1854) 9 Exch 341

L’Estrange v Graucob [1934] 2 KB 394

McKendrick, E. (2014). Contract law: text, cases, and materials. Oxford: Oxford University Press.

Monaghan, C., & Monaghan, N. (2013). Beginning Contract Law. Abingdon: Routledge.

Murray v Leisureplay Plc [2005] EWCA Civ 963

O’Sullivan, J. (2014). Lost on Penalties. The Cambridge Law Journal, 73(3), 480-483.

Smith v Hughes (1871) LR 6 QB 597

Turner, C. (2013). Contract law. Abingdon: Routledge.