Formation of a Valid Contract

A valid contract is formed when there is an offer and acceptance of the same for consideration by competent parties with an intention to be legally bound. Contents of a contract include terms set and agreed on by parties which may be express, implied or both. Therefore parties may find themselves bound by expressly agreed terms as well as those implied by customs and usage in the relevant trade. Similarly, Cloudline and DLE are parties to a contract bound by the agreed terms during formation of the contract. It appears that the parties in the present scenario agreed on the specifications of the phones to be supplied. By virtue of the agreement on specifications of the phones to be supplied, it is deducible that those were express terms of the contract between Cloudline and DLE. Considering that the specifications went to the root of the contract to supply phones hence will be an express term. An express term like the present one could have been incorporated into the contract either orally or in writing and would still be valid and binding on the parties. Therefore, the present terms including one on specifications on phones are binding on the parties. Breach of contract will occur where one party intentionally dishonours a contract and this provides a ground for termination of the contract. Usually, a party failing to meet its obligations under the contract will result in breach of contract. The consequences of breach depends on whether the breach in question is material or immaterial in nature. In a contract, the nature of the condition is important because it goes into the root of the transaction. As a key term of the contract, breach of a condition gives the affected party the right to cancel the contract and claim damages. A distinction has to be made between conditions and warranties as terms of a contract. In this scenario, the question is whether the agreed specifications formed part of warranties or conditions. Where it is clear that the term in question is a condition, the innocent party is entitled to terminate the contract regardless of the magnitude of the consequences of breach. On the other hand, a breach of warranty does not release the innocent party from performance of a contract despite the gravity of breach. The appropriate remedy for breach of a warranty is damages and this has been the position maintained in Hong Kong Fir Shipping Co. Ltd -v- Kawasaki Kisen Kaisha Ltd.

Further, the Sale of Goods Act 1979 provides for terms that can be categorised as either conditions or warranties. Under the above Act, there is a requirement imposed by law that goods supplied should be fit for purpose and accord to the description where it was a sale by description. Again, goods sold by sample are required to reflect the same. The above statutory provisions imply certain terms into a contract for supply of goods between parties in the UK. Hence, the phones ought to have been in accordance with any descriptions previously given by the seller and be fit for purpose for which DLE intended to achieve. DLE can thus reject the goods fully or part of the goods for being unfit for purpose.

In C&S Associates Ltd v Enterprise Insurance Company Plcthe court found that a party could be allowed to rectify poor performance to avoid immediate termination of contract. Hence, a party may be allowed to correct poor performance of a contract instead of immediate repudiation by the innocent party. However, for this to happen it should have been provided in the contract. In a different ruling, the court found that a party faced with repudiatory breach that frustrates the commercial purpose of the contract loses the option of choosing to continue with the contract.

Applying the MSC Mediterranean case above, DLE is faced with a repudiatory breach and can elect to continue with the contract or terminate it altogether. This depends on the nature of performance by Cloudline. It is apparent from the scenario that there was partial performance by Cloudline due to a portion of the phones failing to meet the specifications agree in the contract. This failure goes to the root of the contract and can be construed either as a major breach or minor breach. If it is considered as a major breach, DLE will be entitled to repudiate the contract and shall be discharged from any further obligations. This option results in termination which basically ends the contract where the breach has frustrated the commercial purpose of the contract.

Alternatively, the breach can be treated as a minor one considering that the breach is partial and is capable of being remedied by supply of similar phones as specified in the agreement. In that case, DLE will afform the contract and allow Cloudline to complete performance. In case of any loss resulting from delay or inconvenience, they can subsequently sue Cloudline for damages. The test of commercial purpose is also applicable to this end. Consequently, partial performance by Cloudline can be taken not to frustrate the commercial purpose behind the transaction given that it can be remedied as fast as possible by DLE if they undertake to do so. Repudiatory breach in this case is occasioned by breach of innominate terms.

Moped Ltd is in the process of being wound up by a court appointed liquidator. Section 124(1) of the Insolvency Act 1986 provides that any creditor can make an application to court for winding up of a company. And a company is taken to be unable to pay its debts if it is shown to the satisfaction of the court that its liabilities exceed its assets. While a company can adopt voluntary arrangements of insolvency, courts have the power on application of creditors to order compulsory liquidation. A dissatisfied creditor can move to court for compulsory liquidation where he is owed over 750 and the company is insolvent. During winding up of the company by the liquidator, there is an order of payments made to creditors. There is an order of priority of creditors in insolvency situations depending on the creditor’s rights. In this scenario Moped Ltd has different creditors seeking payments from the company from the court appointed liquidator. Before any creditor is paid, the costs or expenses incurred by the liquidator come first. Expenses incurred by the liquidator ranks higher than any other creditor in the order of payments by the liquidator. Therefore, 40,000 pounds will be paid to the liquidator from the assets of Moped Ltd.

After settling the liquidator’s expenses, the next in line are secured creditors. Secured creditors are those that have a legal right or charge over property of the company in liquidation. In this scenario, Venture Investment Bank plc ranks second in the order of stakeholders to be paid from the assets of the company under liquidation. As a result, the bank will be paid from the remainder of assets of Moped Ltd. Following the bank as a secured creditor, unsecured creditors will be next in the order of payments. Cloudline will thus be third in line for the payment of the 70,000 pounds. However, the question as to whether the company will receive money from the sale of assets depends on the availability of funds after the high ranking creditors have been paid.

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Bibliography

C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757

Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40

Hong Kong Fir Shipping Co. Ltd -v- Kawasaki Kisen Kaisha Ltd

Andrews Neil, Contract law. (Cambridge University Press 2015)

Arbitration (Scotland) Act 2010

Arbitration Act 1996

Insolvency Act 1986 s123

UNCITRAL Model Law on International Commercial Arbitration