Business Law: Common Law Of Contract

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Business Law: Common Law Of Contract

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Business Law: Common Law Of Contract

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Discuss about the Business Law for Common Law of Contract.
The common law of contract requires the fulfillment of three basic elements:
1. Agreement
2. Intention to create contract
3. Consideration
The fulfillment of these three criteria leads to the formation of a valid contract.[1]However, over the years, certain gaps have been found in the common law of contract sometimes due to the stronger bargaining position of a party or sometimes due to non-enforcement of an agreement by a party. These gaps have been fulfilled by the law of equity. The equitable principles and good conscience have consistently prevented the stronger party to keep advantage of their position and have kept them within their limits.
However, through the principles of equity, the intervention of Judges in contractual matters have unnecessarily increased to a great extent and this discretionary power of the Judges are being exercised every now and then. Moreover, there is no certainty about the instances in which the Court can come in between the individuals in matters of contract.
Application of equitable principles with respect to promissory estoppel
Case: Waltons Stores Interstate Ltd v Maher (1998)
In this case negotiations were entered into two parties, Maher and Waltons, in pursuance of which, Maher was required to lease his owned property to Waltons. Maher was required to construct a new building in the property after demolishing an existing one. As per the negotiations, Maher demolished the existed building in the property and started constructing a new one. It was at this moment that Waltons decided not to proceed further with the agreement. Subsequently Maher filed a suit against Waltons for enforcement of the agreement.
In this case, an agreement was entered into between the parties but they had not done the formalities of a contract. Therefore, there was no real contract entered into between the parties. The Court applied the principle of promissory estoppel and estopped Walton from saying something different from what he had said earlier. The circumstances of the case show that Maher was under an assumption that Waltons would proceed with the agreementand consequently he incurred expenses on erecting a new structure in the property. Waltons never warned Maher from proceeding further with the construction work and thus in way induced him to go ahead with the agreement.
The doctrine of promissory estoppel thus helped to enforce the agreement in the absence of a valid contract. In this way equitable principles helped to repair the injustice left in the common law of contract.
The principle of promissory estoppel has been applied in various cases in subsequent yearsfor enforcing agreement between parties in the absence of a real contract.
In the case of Weeks v. Hrubala, the issue was relating to proprietary estoppel, wherein the plaintiffs alleged that the deceased made a series of promises to the plaintiff that the property would belong to them for the rest of their lives. The deceased made this promise in consideration of the maintenance of the property by the plaintiff. However, the case lacked in providing sufficient link between the work done and the promises made and consequently the case failed on facts. The plaintiff lost his claim of proprietary estoppel. The Court rejected the applicability of the doctrine of promissory estoppel only as it lacked in case facts. This case is a clear example of the fact that depicts that the Court has exclusive discretionary powers wherein they can apply the doctrine of promissory estoppel relying only on the facts of the case. The discretionary power of the Court leads to certainty to the meaning that is contained in the statutory law.
Application of equitable principles against unconscionable conduct
Case: Commercial Bank of Australia V Amadio
In this case,Vincenzo Amadio had taken a loan from the Commercial Bank of Australia. His parents acted as guarantors to the loan. The fact of the matter is that the financial position of the debtor was not good and moreover,the guarantors were under a belief that their liability was limited to an amount of $50,000.  Thus, the guarantors were not aware of the nature of the transaction and the bank neither informed the guarantors that their liability was unlimited nor informed them about the debtor’s unstable financial condition. Subsequently,the debtor failed to repay the loan and the bank proceeded to enforce the guarantee by mortgaging theproperty owned by the Amadios.
The Court held that the bank was at fault and has indulged in an unconscionable conduct by taking advantage of the situation. It was the duty of the bank to inform the guarantors about their unlimited liability and also about the unstable financial condition of the debtor. By failing to do so, the bank had tried to take undue advantage which is not just under the equitable principles. Thus, the contract of guarantee was set aside by the Court on the ground of unconscionable conduct by the Bank.  Had the principles of the common law of contract been attracted in this case, then the bank would have easily done away with its misdeed. But the principles of equity have repaired the injustice and have given justice to the weaker party of the contract.
The ratio of the Amadio case has been followed in the subsequent case of Armendariz v. Foundation Health Psychcare Services, Inc. The Supreme Court of California decided this case and the issue was related to determining the factor that shall amount to unconscionability. According to the Court, for a contract to be void on the grounds of unconscionability, both procedural and substantive element is required.  A court may exercise its discretion in enforcing a contract if they feel that the contract is unconscionable in nature. In this case, the arbitration agreement contained no clause of negotiation and the lack of such a clause made the Court declare the contract as unconscionable. In this case, the Court used their discretion and declared the contract unconscionable. According to many theorists, equity gave a lot of power to the Judges to decide cases in which the meaning of the laws and principles were not clear. Since the doctrine of unconscionable contract does not have any clear meaning in any statutes or regulations, the Court has the power to regularize such doctrines.
The fact of the case was that a civil engineer had contracted with West Beach Research Laboratory to install some mechanism through which water would be pumped to and from the laboratory. The engineer performed substantial part of his obligation, but unfortunately the work could not be completed due to some underwater obstruction. Thus, extra work needed to be done for overcoming the obstacle. The principal, thereafter, put some condition which was to be complied with by the engineer; otherwise the engineer would be replaced by a new one. The engineer pleaded for unconscionable conduct on the part of the principal. The Court found out that the principal was taking advantage of the situation and the contractor was in a financially weaker position and found it appropriate to apply the ratio of the Amadio case.
Thus the principles of equity have been efficiently applied to prevent unconscionable conduct by the parties.
However, the fact cannot be ignored that the principles of equity has given a lot of discretionary power to the Judges. The judges are applying the equitable principles according to their choice and this has undermined the clarity which common law of contract provided. Giving all the power to the judges may prove to be unfruitful. The capacity of the parties to decide the terms and conditions of contracts for themselves are also getting effected by the intervention of Courts. Under these circumstances, the need of the hour is to draw a line between the instances where the Court can intervene and the instances where the Court cannot interfere.
The principles of equity and good conscience have undoubtedly afforded flexibility and discretion to the Courts to do justice to the parties. However, giving extreme power to the Judges may not prove to be a constructive development. Individuals, while framing the terms of a contract, make law for themselves and they act accordingly. The intervention of Courts in matters relating to contracts has affected the law making power of the individuals and the problematic part is that there is no clarity about the grounds when the Courts can intervene. ‘Unconscionable conduct’ and ‘promissory estoppel’are few instances in which the Courts have exercised their discretionary power. This power well extends beyond these instances and Courts’ power to intrude is nowhere defined or limited and this is not a constructive idea.
Contract (2016) LII / Legal Information Institute
(2016) .
Waltons Stores (Interstate) Ltd V Maher [1988] HCA 7; (1988) 164 CLR 387 (19 February 1988) (2016)
Promissory Estoppel (2016) LII / Legal Information Institute .
(2016) .
Commercial Bank Of Australia Ltd V Amadio [1983] HCA 14; (1983) 151 CLR 447 (12 May 1983) (2016) .
Principle Of Conscience In The Equity Courts (2016) .
(2016) .

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