CONTRACT LAW EXAM

Name :
Question no 1:
Legal Restrication on the right of innocent party
In MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016]
EWCA Civ 789, the Court of Appeal held that the innocent party who
was subject to a repudiatory breach did not have the option to affirm
the contract once the commercial purpose had become frustrated,
because at that point further performance by the defaulting party had
become impossible.

Background

The claimant agreed to ship containers of cotton to Bangladesh for the

defendant. The contract expressly gave the defendant 14 days of "free
time" from the day the containers were put ashore in Bangladesh, after
which time the defendants had to return them to the claimant. If the
defendant failed to return them the contract imposed demurrage
charges at a daily rate with no time cap.

While the cotton was in transit there was a collapse in the price of raw
cotton and a dispute arose about the dating of the bills of lading with
the result that nobody was willing to take delivery of the goods, which
remained at the port. The dispute that followed prevented the claimant
from taking back the containers, and the defendant from returning
them to the claimant. This case arises out of a dispute between the
carrier (the claimant) and the shipper (the defendant), with the carrier
seeking to claim demurrage charges which it said would continue to
accrue under the contract until the containers were redelivered.

The shipper argued that its inability to redeliver the containers within
the foreseeable future amounted to a repudiation of the contract,
which the carrier was obliged to accept and which had therefore
brought the contract, and therefore the continuing obligation to pay
demurrage, to an end.

Decision

The court held that the claimant was only entitled to the demurrage
payment accruing from the end of the expiry of the "free time" up until
the date when the contract had been terminated by the defendant's
breach.

Where a repudiatory breach of contract occurs, an innocent party has a

choice: it can accept the repudiation and bring the contract to an end,
or it can affirm the contract. Affirmation is available unless the innocent
party has no legitimate interest in continuing to perform the contract: if
damages are an adequate remedy, and the decision to affirm the
contract is wholly unreasonable, then the innocent party cannot have a
legitimate interest in continuing the contract.

In this case, the court held that the option of affirming the repudiatory
breach was not even open to the innocent party because at the time of
the repudiation, the commercial purpose of the contract had become
frustrated and further performance by the shipper was impossible
because it could not deliver the containers back to the carrier.

However, even if that wasn't the case, the carrier did not have a
legitimate purpose for keeping the contract alive when it became clear
that the shipper was in repudiatory breach of the contract, For example
when it was clear it could not return, the containers the only interest in
affirming the contract after the breach would be for the claimant to
claim demurrage which was "wholly unreasonable" and simply a way of
claiming "free income".

The court ruled that the carrier could claim demurrage up to and
including the day before the contract became frustrated and damages
in respect of the loss of the containers calculated using their value on
the date they were lost.

As well as illustrating the need to consider whether there is still a

legitimate interest in keeping a contract alive, this decision also
suggests that keeping a contract alive for the sole purpose of claiming
liquidated damages is unlikely to be considered reasonable.

Question no 2 :
Contract (Rights of Third Parties) Act
1999
The Contracts (Rights of Third Parties) Act 1999 which received Royal
Assent on 11 November 1999. They have been prepared by the Lord
Chancellor's Department in order to assist the reader in understanding
the Act. They do not form part of the Act and have not been endorsed
by Parliament.They are not, and are not meant to be, a comprehensive
description of the Act. So where a section or part of a section does not
seem to require any explanation or comment, none is given.

The Act reforms the rule of "privity of contract" under which a person
can only enforce a contract if he is a party to it. The rule means that,
even if a contract is made with the purpose of conferring a benefit on
someone who is not a party to it, that person (a “third party”) has no
right to sue for breach of contract.

 The Act sets out the circumstances in which a third party is to

have a right to enforce a term of the contract (section 1)

 The situations in which such a term may be varied or rescinded

(section 2)

 The defences available to the promisor when the third party

seeks to enforce the term (section 3).

 It makes it clear that section 1 does not affect the promisee’s

rights, or any rights that the third party may have which are
independent of the Act (sections 4 and 7(1)).

 The Act does not apply to certain contracts (whether wholly or

partially) (section 6).

On the other hand, it has been suggested that by allowing third parties
to sue upon a contract to which he is not a party would ‘lead to an
indeterminate range of liability’ and since the law requires certainty
and predeictability, by allowing third party rights, it would make the
law uncertain and unpredictable. Section 1(1) a, allows a third party to
enforce a term of the contract where the contract ‘expressly provides
that he may’. This has improved the situation such as Tweddle v
Atkinson, because it gives effect to the intentions of the parties.

Question no 3:
Intention to Create Legal Relation
Intention to create legal relations is defined as an intention to enter a
legally binding agreement or contract. Intention to create legal
relations is one of the necessary elements in formation of a contract. It
is because, intention to create legal relations consists of readiness of a
party to accept the legal sequences of having entered into an
agreement. Intention to create legal relations is a motion of every
contracting party must have the necessary intention to enter into a
legally binding contract.

There are a few concept of intention to create legal relations. Intention

to create legal relations also means an intention to be serious about
agreement significance:

a) The contracting parties mind will be obvious to enter a serious

contract
When two parties decided to enter in the environment of a contract,
their mind will understand the contents of the contracts. This is due to
their ‘intention’ to be consenting mind which both of the parties have
to agree. If there is no agreement by both of the parties, it may make
the contact being a void agreement. Thus, both of the contracting
parties will enable to be serious into the contract.

b) If there is no intention to create legal relations the contract would

not be enforceable, legal and binding

Intention to create a legal relation is one of the essential elements of

contract. So, if there is no intention to create a legal relation, the
contract can be assumed as a not legal. Due to that, the contract may
not being enforceable because there is no intention to create legal
relations at the beginning which not making contracting parties to be
legally binding.

c) Without intention to create legal relations, the parties cannot sue

each other

With no intention to create legal relations, it may cause the contracting

parties are not being legally binding and this circumstances may cause
the contract is enforceable. Therefore, when the contract is
enforceable, the contracting parties cannot sue each other and this will
spoil their business crisis. This will make the contracting parties hard to
enquire their justice.
d) Without intention to create legal relations the contract may become
a mere promise

In addition, with no intention to create legal relations, it will make any

contract to become a mere promise. Mere promises simply like a
simple promise arise when there is no intention to create legal relations.
Based on the case of studies, the situation of mere promises can be
seen when Nathan, the Comfortable Furniture Sdn Bhd salesman have
no intention to create legal relations. He did not accept cash deposit
from Mr John to obey the company policy. When the mere promise
occurs, the salesman still can sell the dining set to other people
because they is no legal contract between Nathan and Mr john.

e) Without intention to create legal relations the contract may lack the
binding effect

Besides that, when there is no intention to create legal relations, it will

make the contract or agreement become less powerful due to whether
one or both of the parties does not have a consent mind. So, if the
contract lack of binding effect, it will cause the difficulty to the party
involved in future.

Domestic and social agreements of intention to create legal relations

can be broken down into three groups which are firstly commercial or
business relations, secondly social friend’s relations and thirdly family
or domestic relations.

Case example: Shadwell V Shadwell in year 1860

In this case, Shadwell was under a contractual duty with a third party to
marry. Shadwell’s uncle promised to pay him £150 per year after he
was married. It was held that Shadwell marrying was good
consideration, notwithstanding that he was obliged by a contract with a
third party to marry in any event.

There were so many desertions that the contracted parties were no

longer working in the same circumstances as when the contract was
formed. Hence there were entitled to consider it discharged. This
makes the captain’s offer of increased wages, and acceptance by the
sailors, an entirely new contract. Before the fresh promise was made,
circumstances had arisen which would have entitled the promisee to
refuse to carry out his obligations under his contract.