Joe had never had such a big order to fill. After looking at his stock on-hand, he calculated that he needed to order an additional 75 Central Processing Units (“CPU”). He decided to call his good friend Annie who owned and managed an IT supply company. Joe had been good friends with Annie for over 20 years and he was sure that she would be able to give him a good price. Annie was excited for Joe and told him that she would send an email with further information the next day.
On 12 February 2018, Joe received an email from Annie quoting a price of $4,000 for 75 CPUs. In the email, Annie advised Joe that this was the cheapest she could go for 75 single core CPUs. Joe was concerned that the single core CPUs may not have enough power to meet the Schools’ needs and wrote back to Annie the same day. ‘I have concerns that the single core might not be powerful enough. What is the lowest price that you could do on an order of quad-core CPUs? I will probably still go with the single core option but interested in comparing prices. Please keep this original quote open for 14 days while I work on my calculations?”
On 16 February, Annie sends Joe another email quoting a price of $12,000 for 75 quad-core CPUs. Both emails from Annie have an order form attached, and state ‘If you wish to accept this quotation, please print off and sign the attached order form and return by post.’ The order form further states that all quotations are valid for a period of seven days.
When Joe reads the second email, on the morning of 17 February, he decides that the quad-core CPUs are too expensive for his budget. He immediately prints the order form attached to the first email (from 12 February), signs it and posts it to Annie that same day. Meanwhile Annie had received an order for her entire stock of single-core CPUs from a major computer manufacturer called Pear. On 18 February, Annie writes an apologetic email to Joe telling him that she had sold all of her single core CPUs and that he would have to wait until August for new stock to arrive. Upon reading this, Joe immediately calls Annie and explains that he cannot afford the quad-core CPUs, ‘You will have to find the single cores from somewhere else,’ he says, ‘I have sent the order form back, and as far as I am concerned, we have a contract.’ Annie was confused, ‘What are you talking about? I haven’t received your order form yet. You have until tomorrow to let me know whether you want the quad-cores.’
Joe was upset with Annie and decided to explore his options. After a bit of searching, he is able to source the single core CPUs from another IT supplier, but at a total price of $7,000. Disappointed with the increased expense, Joe decides to go ‘door- knocking’ in his local neighbourhood to see if he can gather some new business.
He knocks on the door of Florence Nightingale, a 70-year-old lady who spoke very little English and had very limited computer literacy. Joe told Florence that he was offering a free service on computers in the neighbourhood. Florence thought this was a great initiative and welcomed him in.
Upon inspection of Florence’s computer, Joe tells her that her machine was filled with dangerous viruses and that she was in urgent need of an upgrade. Florence was a bit surprised as her daughter had only bought the computer for her six months earlier, but nevertheless thought Joe seemed trustworthy enough. Joe asked Florence a few questions about how she uses the computer, for which she responded, ‘just the odd email and to sometimes video call with my grandchildren Esmeralda and Michelangelo.’ Joe tells Florence that he has the perfect machine for her and that he is offering a special price if she signs today. He provides Florence with a basically worded contract which she signs without reading. The contract requires Florence to pay Joe $2,000 on delivery of the computer and included the following disclaimer:
Connect Computers does not warrant or guarantee that any products sold or provided will be fit for any purpose, howsoever described or disclosed.
About a week later, Joe delivers a newly built computer to Florence and provides her with an invoice for the full amount ($2,000). However, the computer came with no operating system or applications and Florence is unable to use it. Sometime later, Florence’s daughter Rachel came to visit and finds the invoice on the table. “Mum, why have you bought a new computer? The one you had worked perfectly fine. There were definitely no viruses on it, I do a scan every time I am here! Plus, the one you have bought is incredibly overpowered. What do you need 16GB of RAM for?” Florence responded, “Oh Rachel, I haven’t bought 16 rams. Where would I put all those sheep?”
$45,000 as payment. However, he is still annoyed that he had to pay a higher amount for the CPUs and is seeking your advice as to whether he has any remedies under contract law. He has also received an angrily-worded letter from Rachel refusing to pay the $2,000 invoice and threatening to take legal action against him.
You must be the new lawyer. I have just met with a new client, Joseph Brunetti. Joseph runs his own successful computer store and is looking to expand his business. He has had enough of running the business by himself and has come to seek our advice on ways he could potentially structure his business.
As way of background, Joseph has been operating as a sole trader for approximately 10 years. He has been lucky enough to land a few contracts to supply and install computers in local primary schools. However, he is now looking to take the next step and establish a 24/7 IT service support arm of his business, with the hope that he can secure service contracts with the schools he has already supplied to. As part of this, Joseph wants to purchase a bigger warehouse and a fleet of vehicles. He estimates that this will cost approximately $600,000. He is also looking to hire more staff to support the anticipated increase in workload.
Although he does not want to give up control of the day-to-day operations of the business, he would consider offering part-ownership in exchange for some of the capital required. He currently has two friends (Sarah and Malcolm) who are interested in investing, but Joseph is concerned with the number of failed businesses that Malcolm has been involved in. I am of the understanding that Sarah will be able to provide $300,000, Malcolm $180,000, and Joseph the remaining $120,000.
In our conversation, Joseph identified a number of key concerns for your consideration. This included:
Your job is to prepare a memorandum of advice for the client. Your advice should include a brief discussion of the strengths and weaknesses of each potential option, keeping in mind the specific needs for the client. Remember to include specific recommendations on what Joseph should do – the client isn’t paying us for nothing!
Advise Joseph of the potential ways to structure his business, including the strengths and weaknesses of each option for Joseph’s specific circumstances. You must consider Joseph’s assets and liabilities when giving advice.
Background Information on Joseph Brunetti and Connect Computers
The issue is to check that whether there is a valid contract between Joe and Annie?
For a valid contract, there must be an offer and acceptance. For an offer, this is necessary that the same must be properly communicated to the offeree. Parties to the contract can choose any mode of offer and acceptance. In those cases where parties do communication via particular mode, then such mode will be considered as a valid one. For an acceptance, this is required that the same must be made within the time mentioned in the offer itself. If no time is mentioned by an offeror under an offer, the offeree can accept the same within a reasonable time period. Further, an acceptance must be communicated to the offeror.
In some of the cases, offeree asks for further information from the offeror in order to take a wise and reasonable decision. It was held in the case of Harvey v Facey that such information cannot be treated as a counteroffer until unless puts some additional conditions and therefore such information does not cancel the original offer.
When an offeree gives his/her acceptance via post then postal rules will be applicable. It was held in the case of Adams v Lindsell that under postal rules, an acceptance will be treated as complete as soon as offeree drops the confirmation letter to the mailbox.
An offer can be revoked at any time before the acceptance takes place. It was held in the case of
Dickinson v Dodds that an offeror can revoke or withdraw the offer before offeree accepts the same. However, when an acceptance takes place, then a valid contract will be developed between the parties and thereafter the offeror will not be able to revoke the offer.
In the given case, on 12th February 2018 Joe has received the mail regarding quotation of 75 single core CPUs from Annie. In the said mail, Annie has offered 75 single core CPUs for $4000 to Joe. This was an offer of the case and the of communication that parties chosen were e-mail, which was a valid one. In reply to this mail, Joe was required to accept the offer in the manner mentioned in the mail. It was stated in the mail that if Joe wants to accept the offer, he need to take print out of the form and send the same via post after signing. Further, it was also mentioned that the quotation is open for the next 7 days. It means Joe could accept this offer by 18th February. Joe at the first did not accept the offer but requested Annie to keep open the offer till next 14 days and also asked for some further information. The information he asked was a quotation related query regarding 75 quad-core CPUs. This was not a counter offer and therefore the first offer was still validly opened for Joe with the original terms and conditions
Contractual Dispute with a Supplier
On 16 February 2018, Annie sent another mail to Joe stating quotation of 75 quad-core CPUs. The quotations were not suitable for Joe and therefore he decided to go ahead with an original offer without considering additional information provided by Annie. As it was mentioned in the mail that acceptance needs to be given within 7 days via post, Joe has posted the acceptance letter to Annie on 17th February. Applying the provisions of postal rules, acceptance will be treated as valid and complete as on 17th February.
Annie could withdraw the offer before acceptance was made by Joe i.e. before 17th February but she did not do the same. Therefore, a valid contract was there between Joe and Annie.
Conclusion (a)
Annie has made an offer that Joe accepted within the prescribed time, hence a valid offer and acceptance was there. In addition to this, consideration was also there and both the parties have the intention to create a legal relationship with each other. As all the necessary elements existed in the transaction, this is to conclude that a valid contract has developed between Joe and Annie in respect to the sale of 75 Single core CPUs for consideration of $4000.
Another issue involved in the case is to check that whether Joe can seek any remedies under Contract Law or not?
Under Contract Law, a contract can be discharged in many ways such as by performance, by agreement, by frustration, and by the breach. Where one party does not perform the obligation as required under the contract, then such a situation is termed as a breach of contract. If a party perform one or more obligation under the contract but does not perform according to the required manner then also it will be treated as a breach of the contract. Breach of a valid contract makes the guilty party liable and another party of the case (innocent party) can initiate an action against the liable party. It was held in the case Hochster v De la Tour that where one party show his/her intention to not to perform the obligation under the contract, then the other party would not be required to wait till the actual breach. In such a situation the innocent party can initiate an action against the first party on the basis of his/her non-intention to perform obligation set under the contract. This situation is known as an Anticipatory breach and the innocent party can ask for the performance of the contract except in those cases where the personal skill of the defendant is required.
Legal Contract Issues and Remedies
In the studied case, there was a valid contract between Joe and Annie. Annie has denied delivering 75 Single core CPUs to Joe as on 18th February 2018. Her conduct cannot be treated as a revocation of the offer as by sending acceptance letter on 17th February, Joe has accepted the offer made by Annie. A valid contract has developed between both of them as on 17th February 2018. Now, as Annie has denied providing 75 Single core CPUs to Joe, this can be stated that she has breached the contract. Joe can initiate an action against her.
Conclusion (b)
To conclude the issue involved in the case, this can be stated that Joe can sue to Annie for the performance of the contract as she has breached the conditions of a valid contract by saying no to provide 75 Single core CPUs. Joe can also ask for the damages if any would occur him cause
Whether Florence will be succeeding in any claim against Joe or not.
For a valid contract, it is necessary that all the required elements must be there. Offer and acceptance are two basic elements of a contract. In addition to the existence of these two factors, the validity of the same is also necessary. An acceptance must be free from any unfair terms such as misrepresentation, fraud, and unconscionable conduct.
Unconscionable conduct: - This is a state of a contract where one party (offeror) holds a superior bargaining power over another person (offeree) and use such power to seek the acceptance of such other person (offeree). The factor of unconscionable conduct exists in those situations where the other person has some disadvantages such as poverty, illiteracy, drunkenness, lack of education and so on and other person takes unfair advantages of such disadvantages. It is a situation where this is to assume that a reasonable person would not have entered into such a contract. The fact, that in a contract whether the acceptance is affected by Unconscionable conduct or not can be determined by reviewing the position of offeror and offeree. If an offeror remains in a capacity of bargaining power and offeree contains some special disadvantage, then this will be assumed that consent given in the case is not an independent one and offeree has made such consent because of the influence of offeror. It was held in the case of Blomley v Ryan that a person cannot ask for the performance of the contract if an element of unconscionable conduct exists there.
Contractual Dispute with a Customer
A contract, where acceptance is not independent or the same is affected by the unconscionable conduct of another party, cannot be held enforceable.
Exclusion Clause: - This term is also counted as an unfair term under Contract law. This is a situation where one party of the case escapes or limits his/her liability under a contract by stating a statement. Such a statement is known as an exclusion clause in a contract. It was given in the decision of the case of L’Estrange v Graucub that regardless of the fact that a party has read out such clause or not, an exclusion clause will be valid and applicable if the same is mentioned under a contract and other party signs the contract.
Invalidity of Exclusion Clause:- An exclusion clause work well in a valid contract. However, in that situation where a party seeks the consent of another party by Unconscionable conduct, an exclusion clause will not be held valid as the same limits the right of the victim person i.e. offeree.
In the given case, Joe has decided to go for an option of ‘door knowing’ to seek some new employment. One day he knocked on the door of Florence Nightingale, who was a 70-year-old lady. She owed a computer. Joe offered free checking of the computer to Florence. He checked her computer and said that there are many viruses in her computer and she should change the same. He further asked the uses of a computer for Florence. Florence replied that she needs to send some email and to do video calls with grandchildren. This was the only utility of computer for her. Joe has offered a sale of a computer for $2000 to Florence. Florence became ready to purchase the same as she had a very few computer literacies. Later on, it has come into light that the computer sold by Joe had no applications and operating systems. Here in the case, joy done an unconscionable conduct as in actual computer had no viruses. Joe took benefit of less knowledge of Florence and was liable towards her. Further, the features of the provided computer were not fulfilling the purpose of Florence.
Exclusion Clause and validity: - Although to escape his liability, Joe has made an exclusion clause under the contract, which Florence has accepted by signing the same. However, the clause will not be held a valid one as acceptance itself was not valid.
Potential Legal Structures for Business Expansion
Conclusion (a)
As Florence had very less knowledge about computers, Joy has taken unfair benefit of her condition and conducted unconscionably. The acceptance provided by Florence will not be treated as valid. Further, the exclusion clause stated under contract will also be held invalid as the acceptance was not an independent one and intention of the exclusion clause was related to the unconscionable conduct of Joe. Therefore, Florence seems to be held successful in her claim against Joe.
What remedies are available with Florence?
In the cases of unconscionable contract, a contract becomes voidable at the end of the innocent party. Where an offeror takes the acceptance of offeree by influencing him/her, then in the lack of independent consent, the contract becomes voidable. In such a scenario, an innocent party can rescind the contract and ask for the damages.
In the given case, Joe used his position negatively over Florence. He took unfair advantage of less knowledge of Florence. He was aware of the actual needs and expectations of Florence still he sold a computer without an operating system. Further, the exclusion clause is also not a valid one because of unconscionable conduct. The contract developed between Joe and Florence is voidable in the part of Florence.
Conclusion (b)
Florence could deny performing her obligation under the contract but as she has already made the payment, now she can sue Joe to take her money back and treat the contract, as the same has never been developed. In addition to this, she can also claim for the damages.
Books/Journals
Amanda C. Brock and Rafi Azim-Khan, E-Business: The Practical Guide to the Laws (Spiramus Press Ltd, 2008)
Cases
Adams v Lindsell (1818) 106 ER 250
Blomley v Ryan (1956) 99 CLR 362
Dickinson v Dodds (1876) 2 Ch D 463
Harvey v Facey [1893] AC 552
Hochster v De la Tour (1853) 2 E & B 678
L'Estrange v F Graucob Ltd [1934] 2 KB 394
Other Resources
E-Law Resources, Discharge of a contract (2018) < https://e-lawresources.co.uk/Discharge-of-a-contract.php>.
Elliott May Lawyers, Unconscionable Conduct: Can a Lender Protect Itself? (2018) < https://www.elliottmay.com.au/unconscionable-conduct/>.
Legal Match, What is an Unconscionable Contract? (2018) < https://www.legalmatch.com/law-library/article/what-is-an-unconscionable-contract.html>.
Lexis Nexis, Contracts—termination and contractual claims and remedies—overview (2018) < https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/5FKM-GJ81-F185-X1CM-00000-00/Contracts_termination_and_contractual_claims_and_remedies_overview#>.
O. Ray Whittington, Wiley CPA Exam Review Fast Track Study Guide (2018) < https://books.google.co.in/books?id=xv8PukDlepsC&dq=For+a+valid+contract,+there+must+be+an+offer+and+acceptance&source=gbs_navlinks_s>.
Peter J. Roberts, Deceit and the enforceability of Exclusion Clauses (15 December 2014) < https://www.lawsonlundell.com/Commercial-Litigation-and-Dispute-Resolution-Blog/deceit-and-the-enforceability-of-exclusion-clauses>.
Upcounsel, What Makes a Contract Voidable? (2018) <https://www.upcounsel.com/what-makes-a-contract-voidable>
Memo
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Date
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15th September 2018
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To
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Junior Lawyer
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From
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Belinda Klein
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CC
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Subject
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New Client – Joseph Brunetti [LEX:10735
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Dear,
This Memorandum of Advice is prepared and presented in order to provide a reasonable advice to Joseph Brunetti in respect to his Business structure.
Current Position of Client and his concern
At present, the client is carrying on his business as a sole proprietorship concern. In the past years, he has installed computers in local schools under few of the contracts. Now, he wants to expand his business by providing 24/7 IT support services. However, the issue that he is facing is lack of capital. The new plan i.e. providing technical support services, demands an initial capital worth $600000. These funds are required to purchase a warehouse and fleet of vehicles for his new business ideas. In the form of Liquid assets Joseph only has $120000 that is available $20000 in the case and $100000 in equity. In addition to this, Joseph also owns a house but the valuation of the same is not clear. In addition to lack of fund, Joseph also has some other concerns such as fear to lose control over business, his desire to minimize overall tax liability and to seek protection from poor management. The given memo is focused on different business structures, that the client can opt and at the end of this memorandum, an advice is also mentioned for the client, however, the ultimate decision will be of the client.
Options available to Client apart from sole proprietorship concern is Partnership Concern and Proprietorship Company.
- Partnership Concern: - This is a kind of business structure in which two or more people pull out their assets together to carry a business and therefore earns profits out of the same.
- Proprietorship Company: - A proprietorship company is a legal structure that has a separate identity from it is members. As given in the decision of the case of Lee v Lee’s Air Farming Ltd.a company will be treated differently from it is officers and members. As the name implies, a Proprietorship Company consists of overall control of one person or a particular group of people.
Memo
Advantages and disadvantages of this format of business are discussed further in the memo considering the concerns of Mr. Joseph.
Partnership Firm: Under this form of business, profit of the firm partner divides among the partners, therefore the same becomes incomes of the partners and firm itself do not need to pay any tax on the profits. This is an advantage of this business structure that it prevents from double taxation system.
Proprietorship Company: A company needs to pay tax on profits. Being the promoter and director of the company, the client will have to pay tax on the profits. Further, as Mr. Joseph also has some funds, this is to assume that he will invest the same in the company and become shareholder thereof. In such a situation, he would also require to pay income tax on the profit income that he will earn from the company.
Partnership Firm: In this form of business, one can raise capital from partners. As the client has limited funds, he can get the same from his friends by entering with them into this business form.
Proprietorship Company: A company can issue the shares and collect the capital for the company. However, in the case of Pty Ltd. (Proprietorship Company) capital cannot be raised from the public but the promoter of the company can issue the shares to his friends and relatives in consideration of capital for his business.
Partnership Firm: Partnership deed defines rights and liabilities of the partners, and one can keep more right with him/her by stating the same in partnership deed, however consent of all the partners are necessary for this.
Proprietorship Company: Board takes a day to day business decision of the company but there are some business transactions, that requires prior approval of shareholders. As in this situation, a major shareholder of the company will be the other people who can take and approve wrong decisions; therefore there is a possibility that business can become a victim of poor decisions.
Memo
Partnership Firm: Partnership firm is a small business structure in comparison to corporations. Employees get more benefits in a corporation in comparison to a partnership firm; hence this option is not eligible to fulfill the expectation of the client.
Proprietorship Company: Company is a strong format of Business. Many commercial laws apply to a company that provides additional benefits to employees. This is the reason that this form of business proves successful to attract and keep the suitable and right employees.
Partnership Firm: Although a client can ensure such control on a day to day business activities, however on all the partners, agency law will be applicable and there is a possibility that other partners can develop a contract on behalf of the business without bringing the same into the knowledge of the client.
Proprietorship Company: In a company, the board of directors takes a decision on behalf of the company. In such a scenario, Joseph can become director of the company and therefore will be able to look after the day to day affairs of the company.
Advice
In conclusion, this is to advise that the client should choose the option of Proprietorship Company. He has his house as an asset and the same will remain secure in the case of a company as personal assets cannot be held liable for the debts of the business. In a partnership form of business, there is a possibility that he can lose is assets in addition to equity. Further, poor management can be control in a company as a proposal of agenda is a thing to do on the part of management but not the shareholders. Shareholders only approve those agendas.
Memo
Cases
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Books/Journals
Carol Padgett, Corporate Governance: Theory and Practice (Macmillan International Higher Education, 2011)
CCH Australia Limited, Australian Master Accountants Guide (CCH Australia Limited, 2009).
Other Sources
Austrlian Governmnet, Partnership (2018) < https://www.business.gov.au/planning/business-structures-and-types/business-structures/partnership>.
Entrepreneur, Business Structure Basics (2018) < https://www.entrepreneur.com/article/75118>.
Jenny Kassan, Raise Capital on Your Own Terms: How to Fund Your Business without Selling Your Soul (Berrett-Koehler Publishers, 2017)
Jim Roy, Employment in small companies vs large companies: What’s the difference? (2018) < https://www.michaelpage.com.au/advice/career-advice/career-progression/employment-small-companies-vs-large-companies-what-s>.
Net Lawman, Choosing a legal structure for your business: Partnership (2018) < https://www.netlawman.com.au/ia/partnerships-ins-and-outs-australia>.
