Contractual Rights of Third Parties – Contract Law Case Study

PROBLEM QUESTION:

Phillipa and George recently opened a cycling café in East London – combining their love for cycling and good food. One of their most popular products was their organic gruyere and mushroom toastie made with fresh sour-dough bread. They also hosted bicycle maintenance workshops, hired-out bicycle related tools, and even had a few electric bicycles that could also be hired out. Behind their counter they posted a sign in full view with large clear letters that included the following:

  1. There is a penalty fee applied if tools are returned late or are lost.
  2. We take no responsibility for any personal injury sustained during use of our electric bicycles, whether due to our negligence or not.

Please see our website at www.cyclecafe.xxxx for further terms and conditions. We also have a copy of our complete terms and conditions at our counter which can be viewed upon request.

It was their second month of operation and things seemed to be going exceptionally well – receiving rave reviews from their customers. However, this week things turned for the worse. On the Monday morning they received an email from their online cheese supplier indicating that as they were out of stock of gruyere they would be unable to fulfil the order. This meant Philippa and George would not be able to make their best-selling sandwiches this week. Later that day that day Ester came in with a tool she was returning late (maximum rental was one week, she was returning it 6 weeks later). When they explained that she would owe five times the value of the tool, as detailed in their terms and conditions (which they referred to in their sign), Ester was outraged and stormed out of the café. When the two thought the week just could not get any worse, they received a letter from the solicitor of a customer who had been injured while riding one of their electric bikes. They claimed that the injury had been the result of negligence on their part as the bicycle had not been safe to ride and that they would be seeking damages for the injury caused.

Advise Philippa and George. (Note only topics covered in first term Contract Law should be considered.)

GENERAL FEEDBACK

Phillipa and George recently opened a cycling café in East London – combining their love for cycling and good food. One of their most popular products was their organic gruyere and mushroom toastie made with fresh sour-dough bread. They also hosted bicycle maintenance workshops, hired-out bicycle related tools, and even had a few electric bicycles that could also be hired out. Behind their counter they posted a sign in full view with large clear letters that included the following:

  1. There is a penalty fee applied if tools are returned late or are lost.
  2. We take no responsibility for any personal injury sustained during use of our electric bicycles, whether due to our negligence or not.

It was their second month of operation and things seemed to be going exceptionally well – receiving rave reviews from their customers. However, this week things turned for the worse. On the Monday morning they received an email from their online cheese supplier indicating that as they were out of stock of gruyere they would be unable to fulfil the order. This meant Philippa and George would not be able to make their best-selling sandwiches this week. Later that day that day Ester came in with a tool she was returning late (maximum rental was one week, she was returning it 6 weeks later). When they explained that she would owe five times the value of the tool, as detailed in their terms and conditions (which they referred to in their sign), Ester was outraged and stormed out of the café. When the two thought the week just could not get any worse, they received a letter from the solicitor of a customer who had been injured while riding one of their electric bikes. They claimed that the injury had been the result of negligence on their part as the bicycle had not been safe to ride and that they would be seeking damages for the injury caused.

Advise Philippa and George. (Note only topics covered in first term Contract Law should be considered.)

Question 1
Contractual Rights of Third Parties
Contract law is founded on the premise of the willingness of the contracting parties to be bound by a contractual relationship. This relationship is formally created through offer and acceptance and exchange of some economic asset to the benefit of either party and to the exclusion of any other party who is not a party to the contract. These rules are embedded in the doctrine of privity of contract and are justified by the notion that contractual responsibility arises when both parties consent to undertake the rights and responsibilities conferred by the contract. In operation, the doctrine of privity of contract limits the ability of a third party to sue or be sued under a contract to which he is not a party.
However, the doctrine of privity may, in some instances, impede the rights of third parties. One such event occurred in the case of Tweedie v Atkinson where a third party was denied the right to sue under a contract despite the parties having made a clear expression of their intention to confer benefit. In this case, the court affirmed the formal requirements of a contract are supreme, and in the absence of consideration, a third party may not be allowed to sue or be sued. In appreciation of the shortcomings of the precedent set in this case, the Contracts (Rights of Third Parties) Act, 1999 responded by providing exceptions to the general rule. Essentially the act provides third parties the right to enforce their rights under a contract if the contract explicitly makes such provision; and a scenario where the contract purports to benefit them.
In this regard, it can be said that the Contract (Rights of Third Parties) Act has formerly stricken the right balance between clarity and fairness. This assertion is justified because the 1999 Act recognizes the complexity of contracts of the 21st century and, in so doing expressly provides for justified and fair exceptions to the doctrine of privity of contract. More so, these exceptions do not upset the primal function of the doctrine of privity of contract, which is to protect third parties from being held liable under a contract to which they are not a party.
Question 2
Capping Liability
The general rule at common law is that the measure of damages should be based on the actual costs to be incurred to put the injured party in the same position as he would have been if the tort had not occurred. In contract, the aim of damages is to put the claimant in the position he would have been had the contract been performed. Simply put, damages focus on restoring the status quo. However, in the recent past, the courts and stakeholders have affirmed the need to cap damages because liability for damages could prove to be endless. This need is reaffirmed by the fact that uncapped punitive damages have led to increased costs of liability insurance which is then conferred upon consumers leading to increased costs in accessing medical services, for example.
Overall the proposal to impose caps on liability does not in any way seek to impede on the right of a claimant to be restituted to the original position. Instead, the caps on liability seek to provide a standardised criteria for awarding damages to ensure that the damages awarded by the courts are not influenced by emotional considerations but are based on the need to restitute the injured party while protecting the public interest. In this regard, it can be said that the caps on liability serve to protect the interests of the injured parties and the public interests. Therefore, the caps on liability align with the overall purpose of damages: to restitute an injured party to the position they would have been, had the damage not occurred.

Question 3
Advise to Maddelena
In the fact scenario given, the contract between Madelena and the bank is voided by the fact that it upsets the cardinal principle of freedom of contract as required in English contract law. Typically, the principle of freedom of contract imposes strict requirements tailored to ensure that the parties to a contract fairly negotiate the contract and that any unconscionable conduct that impacts the contracting party’s freewill has the effect of vitiating the contract.
Taking cognizance of the facts in this case, it is clear that the actions of William’s amount to undue influence. In this context, the definition of undue influence was provided by Lord Millet in National Bank (Jamaica) Ltd v Hew where he posited, “undue influence is one of the grounds on which equity intervenes to give redress where there has been some unconscionable conduct on the part of the defendant.. the doctrine involves two elements. First, there must be a relationship capable of giving rise to the necessary influence, and secondly, the influence generated by the relationship must have been abused.”
Based on this definition, it is clear that William’s exercised undue influence over Maddalena in influencing the decision to sign the contract. More so, William took advantage of Maddelena’s lack of fluency in English to read her the letter from the bank, which advised her to seek legal advise. The mere fact that Williams told Maddelena that she should trust him because he was her only friend in England is further proof of the exercise of undue influence. Taking cognizance of this, it is clear that the contract signed by Maddelena is voided by the fact that she did not enter into the contract out of her own free will. In light of this, Maddalena stands a right to stop the bank from foreclosing on her property.
Advise to William
The effect of exercising undue influence in the process of soliciting security for your loan amounts to voiding the whole contract in its entirety. As such, any liability arising out of the loan is limited to the business as well as to your personal assets.

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