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Contractual Terms and Conditions Essay

Contractual Terms and Conditions

Introduction.

            Contracts are a vital part of any business transaction and they are used to define the relationship between the parties involved in these transactions.  There are express terms and implied terms in all contracts.  Express terms are those which are directly stated in the contract while implied terms are those which are deduced from the general practice of contracts in an industry.  The paper aims at analyzing a case study involving breach of terms of a contract with the aim of revealing the guilty party.  The paper also aims at analyzing other conflict resolution processes and their costs and benefits.  A brief conclusion is given at the end of the paper.

Express and implied terms in a contract.

            There are several terms which are implied in any contract.  The reasons for implied terms are that some terms may be omitted from contracts yet without them; the contract would not make commercial sense[1].  There are two main forms of implied terms in a contract; those which are implied by statute and those implied by courts.

            In the 1979 Sale of Goods Act, there are four key sections which relate to implied terms in a contract.  Section 12 states

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that one implied term is that the seller has a legal right of selling the goods or services.  Section 13 states that when selling goods through description, the goods sold should be similar to those in the description[2].  Section 14 states that the goods should meet satisfactory quality which a reasonable person expects to be met.  Finally, Section 15 states that when selling goods through samples, the final goods should correspond to the sample.

Terms implied by courts.

            ‘As a matter of fact’ is an expression which denotes something which is obvious to both the seller and buyer that it needs not to be specified in the contract.  ‘As a matter of law’ denotes the normal public policy and the general practice of parties involved in a contract.  Finally, customary terms refer to general practices in a particular locality or trade.  For instance, in the bakery industry, a dozen means thirteen and does not have to be included in the contract.

Case study.

            Samir works for AVFC as a contract manager and his duties include overseeing planning, co-ordination, supervision and organization of major contracts in his company.  Currently, his assignment involves managing the construction of a new warehouse facility which is set to serve the warehousing needs of ABS firm.  The three present warehouses which serve the company’s warehousing needs face closure at the year end and are set to be replaced by the new facility.

ABS is a large engineering firm which operates both offshore and onshore, since 2003.  The new warehouse will be located at a supply terminal and is set to serve three oil platforms.  The present warehouses are located on a piece of land that will be sold off for property development.  The sale proceeds will in turn be used to cover the costs for construction of the new warehouse.  Samir was promoted to a contract manager after working for the firm for seven years.  Although he is very comfortable with the job, he faces certain challenges when working with the subcontractor.

            Samir followed AVFC’s procedures and faxed three suppliers requesting quotes.  The fax had several details and some of them included specifications for pipe work and plans which traced where the pipes were to be laid.  WHS designs are the firm which had prepared the specifications for pipe work.  The sent fax message specified that AVFS would make purchases according to its conditions and terms.  After receiving the three quotes, Samir discounted Ashala Piping, a firm which was the lowest bidder.  He did so on the basis of problems which his firm had with Ashala in the past.  Samir analyzed the two quotes and preferred Pipevend’s bid which came to $828,500.   Although this bid exceeded Ashala’s bid by $51500, Samir felt that Pipevend was more reliable and hence a better source.  The third bidder did not bid since the firm preferred carrying out duties in Saudi Arabia.

            However, some of the clauses in the contract which was supplied by Pipevend were inconsistent with AVFC’s terms.  Samir nonetheless continued with the contract and ordered for the pipework.  It was urgently needed for the project to be completed on time.  Since Pipevend’s contract was inconsistent with AVFC’s terms, Samir told his assistant to alter the contract terms.  He sent the reverse order after two weeks and Pipevend sent a confirmatory note which referring to its terms of sale and explained work was ‘underway’.

            Several problems soon emerged and the first was that the delivery was delayed by ten days.  This led to development of problems to another subcontractor who was supposed to build a road, and the latter claimed $225000 for this delay.  The second problem involved the increase in the cost of the materials.  The invoice increased by $129,250 and this was attributed to the increase in materials over the period of the contract.  Pipevend justified their claim by using their original contract.  Samir told the Pipevend project manager that they should not claim this increase and that they could be made liable to pay the $225000.  However, Pipevend’s project manager said that they were not liable to pay for this sum and that AVFC ought to pay for the increase in pipe work costs.

The third problem is that toward the end of completion of the warehouse, some structural engineers realized that some of the pipes which had been used were not the required 125cm but were 110cm.  These pipes needed to be replaced at an additional cost.  This cost was estimated to be around $245,000 and would result in delay in opening this facility.  This provided an opportunity to ABS to claim losses in profit on land sale due to the delay.  This is similar advice which ABC has been given by the structural engineer.

Problems and solutions in the case study.

            The first problem involves delay in delivery of materials by Pipevend and lateness in the planned schedule by AVFC.  This in turn caused the road construction firm to claim damages due to the delay, amounting to $225,000.  The first issue to determine is whether the contract was valid according to Pipevend’s terms or AVFC’s terms, since each had their own version.  AVFC sent their version of the contract and Pipevend confirmed it, but at their own terms, and explained that the work was underway.  There is a conflict on whose terms that the contract was on and it is up to the courts to decide.  In my opinion, since Pipevend commenced work without sorting out the issue with AVFC, this means that they had impliedly accepted AVFC’s terms.  The AVFC contract can therefore be termed as genuine although the court may make a different decision.  In my opinion, most of the issues which arise as a result of the delay are immaterial since the implied terms in contracts can reveal the guilty party.

            As was earlier discussed, one of the implied terms in contracts was that courts imply that contracts follow the public policy and practice.  According to the public policy, when entering into a contract, the goods are expected to arrive within the stipulated period.  There are usually damages or penalties which the seller suffers when he or she delays delivery of goods.  This means that Pipevend must compensate AVFC for damages or penalties attributed to the delay of the materials, especially if the delay was caused by a foreseeable circumstance.  In line with this, it is also public policy that any losses or additional expenses which result as a result of delay in supplying materials should be covered by the seller.  This is corresponds to the principles of equity and fairness which govern the justice system.  The damages which are being claimed by the road construction company amounting to $225,000 should be paid by Pipevend since it directly caused them. AVFC played no role in the delay which led to claims of damages.

            I would advise the three parties involved to seek arbitration due to its advantages which are discussed later in the paper.  In case the parties decide to pursue a court case, I would advise the road construction company to sue Pipevend jointly with AVFC in order for it to recover the funds.  I would also advise AVFC to sue Pipevend for damages claimed by the road construction company as well as those arising from the delay in delivery of the materials.  However, as stated above, I would highly recommend the arbitration alternative to Pipevend’s lawyers since the firm stands to lose a lot of money from damages claimed.

            In the second problem, Pipevend increased the costs of the pipe work by $129,250 after claiming that material costs had increased in the course of the period of the contract.  If the two parties decide to pursue the option of court proceedings, this problem will be resolved after the courts decide on which of the two contracts is valid.  If Pipevend’s contract is found to be valid, this cost will be incurred by AVFC and vice verse.  However, in my opinion, AVFC’s contract is valid and therefore the increase in cost of materials should be covered by Pipevend, unless the increase was not reasonably foreseeable and was caused by a factor beyond Pipevend’s control.

            I would still advise the two parties to go to an arbitrator who will resolve this problem.  This is because a court process will not only be long and costly, but it will also ruin the reputation of both companies involved.  This may affect the goodwill which they enjoy from customers and may cause a decline in sales levels.  However, Pipevend again has higher chances of losing the court case and I would advise their lawyers to seek the arbitration process.

            The third problem involves the supply of the wrong pipes by Pipevend to AVFC which resulted in replacement costs.  Some of the pipes supplied had a diameter of 110cm as opposed to the 125cm which is required.   The replacement costs are estimated to be $225,000.  An additional problem is that the delay in selling land where the structures stand, has made ABC make a claim of loss of profits on land sale.

            According to the implied terms in any contract, the buyer expects to receive what he or she asked for in the order.  In case the seller makes a wrong delivery, the buyer has a right to claim damages for any losses arising from it.  In the case study, Pipevend makes a wrong delivery which results in increased costs.  Pipevend is liable to pay the additional $225,000 for replacement costs as well as any other damages which AVFC may claim as a result of the delay arising from the replacement of the pipes.  The claim of loss of profits on land sale by ABC should similarly be covered by Pipevend since it was caused by the delay in materials.  Pipevend stands to lose a lot of money if the case goes to court and this will damage its goodwill and financial position.  It is therefore imperative that the case be heard through arbitration.

Alternative methods of dispute resolution.

Background.

            Pipevend, AVFC, the road Construction Company and ABC have a conflict among them.  Pipevend is claiming $129,250 from AVFC from the increase in costs of materials as per their contract.  ABC on the other hand is claiming losses which accrue from the delay in selling their land.  The road construction company also has a conflict with AVFC due to the delay in laying pipe work which made it incur additional expenses valued at $225,000.  AVFC has a conflict with Pipevend and believes that all additional expenses incurred as a result of delaying materials should be incurred by Pipevend.  For instance, AVFC believes that the $225,000 claimed by the road construction company should be incurred by Pipevend.  It also believes that the additional material costs amounting to $129,250 should not be claimed by Pipevend.  The additional costs which are claimed by ABC due to the delay in selling their land should be incurred by Pipevend, according to AVFC.  Finally, AVFC believes that the additional costs amounting to approximately $245,000 caused by supply of improper materials should also be incurred by Pipevend.

            In analysis of these conflicts, it is important to note that there are several parties concerned.  The nature of conflict is also different among the several parties involved.  Some conflicts are due to delay in materials, others are due to increase in price of materials yet others are due to the opportunities lost due to delay in materials.  There are several channels which can be used to resolve these conflicts and it is advisable to use them before considering going to a court of law.  This is because going to court may be costly for all parties in the short run may cause negative publicity which will dent the image of the firms and that it may take a long time before the conflict is resolved.

Arbitration.

            This is one alternative which is used to resolve disputes without involving courts.  It is recognized under law and is used by parties who would want to resolve their conflicts without involving courts.  In this conflict resolution process, parties refer their disputes to an arbitrator who makes a decision which binds the parties involved[3].  Arbitration is a very common method of solving commercial disputes and can either be voluntary or non-voluntary.  It can also be either non binding or binding, depending on the type of arbitration process which the parties agree to.  It is important to make a distinction between mediation and arbitration.  Whereas the mediator tries to help the parties to find a common compromise, the arbitrator solely makes a decision on which party is liable and gives the damages which are payable without getting involved in finding a compromise.

            There are several advantages which can be linked to arbitration and some of them are as follows; the first is that if the conflict is technical in nature, arbitration provides the parties involved with an opportunity to choose an arbitrator with the required expertise involved[4].  Another advantage of arbitration is that it is faster than the court process.  This makes justice be dispensed faster and avoids further losses attributable to the conflict.  Another advantage is that arbitration proceedings can be made confidential and this will prevent the denting of reputations of the parties which are involved.

            However, arbitration suffers from certain weaknesses and some of these include that certain forms of arbitration are binding and that the parties involved waive the right to court proceedings and judgment by a jury or a judge.  Another weakness is that in some forms of arbitration parties involved make a payment which goes to the arbitrator and this may be costly especially if the dispute is small[5].  Finally, there are limited ways in which a decision made in an arbitration process may be overturned.  This means that if the arbitrator makes an erroneous decision, this may be difficult to reverse and the affected party may incur an unnecessary loss.

Application in case study.

            In the case study, before the parties involved decide to seek the arbitration process, the advantages and disadvantages of this process should be weighed by each party.  However, the benefits exceed the costs, since the parties which are involved choose an arbitrator who is neutral and who is likely to make fair judgment.  It is in the best interests of all the parties concerned to use this alternative since these are fairly complex issues which arise from a single contractual relationship.  They also involve many parties, and if the case were to go to court, it would take a long time to resolve and cost a lot of money.

            Since there are different parties with different disputes, each dispute should be determined by an arbitrator who all parties are comfortable with.  The dispute between AVFC and Pipevend should be determined by an arbitrator who the two parties are comfortable with.  The arbitrator will be in a position to determine if the contract between the two parties was valid in the first place.  He or she will also determine if Pipevend was justified in increasing the cost of materials and whether AVFC should pay for them.  He or she will also determine if the losses attributable to the delay in laying pipes should be covered by Pipevend or they should be absorbed by AVFC.  Finally, the arbitrator will decide if the costs attributed to AVFC due to the supplying of pipes of the wrong size should be covered by Pipevend or not.  He or she will award the appropriate damages in each scenario.

            On the other hand, the dispute between the road construction company, AVFC and Pipevend should also be determined by an arbitrator who the three parties are comfortable with.  The arbitrator will be able to make a decision on who between AVFC and Pipevend should compensate the road construction company for the losses accruing from delay in laying the pipeline system.  Finally, the dispute between ABC, Pipevend and AVFC should similarly be determined by an arbitrator who the three parties are comfortable with.  This will enable the arbitrator to decide whether the loss on profit attributable to lack of sale of land should be covered by AVFC or Pipevend.

Summary and conclusion.

            Contracts are a vital part of any business transaction and they are used to define the relationship between the parties involved in these transactions[6].  There are express terms and implied terms in all contracts.  In the above case study, Pipevend flouted several rules of the contract which affected other stakeholders involved.  These included AVFC, ABC and the road construction company.  The losses and damages which arose as a result of this delay should be covered by Pipevend.  However, a court process would be lengthy and expensive in resolving this conflict.  It would also pose a threat to the goodwill of the companies involved if the court proceedings are made public.  In light of these circumstances, arbitration would be the best option of resolving the conflict to the satisfaction of all parties involved.  The decision made by the arbitrator should be binding in order to ensure that the aggrieved parties receive justice.

Bibliography.

Campbell Dennis, Meek Susan, Center for International Legal Studies. The Arbitration Process. New York: Kluwer Law International, 2002, p 54-67.

Derains Yves, Schwartz Eric A., International Chamber of Commerce. A Guide to the ICC       Rules of Arbitration.  New York: Kluwer Law International, 2005, p2-26.

Elliott  Catherine & Quinn  Frances. Contract Law. Washington: Pearson Longman, 2007, p       76-83.

Grundmann, Stefan & Mazeaud, Denis. General Clauses and Standards in European Contract    Law: Comparative Law, EC Law and Contract Law Codification.  New York: Kluwer Law International, 2006, p118-123.

Grundmann,  Stefan & Schauer, Martin. The Architecture of European Codes and Contract        Law.  New York: Kluwer Law International, 2006, p110-114.

Lew Julian D. M., Mistelis Loukas A., Kröll Stefan. Comparative International Commercial       Arbitration. New York: Kluwer Law International, 2003, p15-25.

[1]             Elliott  Catherine & Quinn  Frances. Contract Law. Washington: Pearson Longman, 2007, p 76-83.
[2]             Grundmann, Stefan & Mazeaud, Denis. General Clauses and Standards in European Contract Law: Comparative Law, EC Law and Contract Law Codification.  New York: Kluwer Law International, 2006, p118-123.
[3]             Derains Yves, Schwartz Eric A., International Chamber of Commerce. A Guide to the ICC Rules of Arbitration.  New York: Kluwer Law International, 2005, p2-26.
[4]             Campbell Dennis, Meek Susan, Center for International Legal Studies. The Arbitration Process. New York: Kluwer Law International, 2002, p 54-67.
[5]             Lew Julian D. M., Mistelis Loukas A., Kröll Stefan. Comparative International Commercial Arbitration. New York: Kluwer Law International, 2003, p15-25.
[6]             Grundmann,  Stefan & Schauer, Martin. The Architecture of European Codes and Contract Law.  New York: Kluwer Law International, 2006, p110-114.

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