Collateral Contracts in Face-to-Face Transactions: The Role of Manner of Payment, Exercises of Law

Download Collateral Contracts in Face-to-Face Transactions: The Role of Manner of Payment and more Exercises Law in PDF only on Docsity! OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 34! In Defence of Ingram v Little : Unders tanding Colla te ra l Offe r and Acceptance Jian Jun Liew 1. Introduction n the line of cases on mistake as to identity in face-to-face transactions, the case of Ingram v Little1 has been heavily criticised, including by a majority of the House of Lords in Shogun Finance Ltd v Hudson.2 It is often said to have been wrongly decided. In particular, it is difficult to see how Ingram v Little can be reconciled with Lewis v Averay.3 The latter case is typically considered to be the correctly decided case, particularly given the earlier decision of Phillips v Brooks.4 However, it is possible to arrive at an interpretation of Ingram v Little which reconciles the trio of cases in this line. This article seeks to argue that an appropriate framework for understanding such face-to- face transactions, and all face-to-face transactions in general, is one centred around collateral agreements. Such transactions make better legal sense under this framework. This article then relies on one such specific collateral agreement, that centred around the method of payment, to explain why Ingram v Little can be reconciled with the other face-to-face mistake as to identity cases. To simplify illustrations, we would always use A as the vendor, B as the rogue, C as the person the rogue purports to be, and Z as the bona fide purchaser. 2. Fa ce -to-fa ce v e r sus Ind ir e ct Contr a cts : T he Ar t of ‘Col l a p s ing’ Collateral contracts are poorly defined across most of contract law. One would be hard pressed to find some unifying doctrine explaining collateral contracts on the whole. This section explores what will be referred to as the collateral agreement theory in face-to-face transactions. The basic idea of a collateral contract places a promise, that is contractually binding in a contract, “collateral” to the “main” contract.5 A collateral contract is hence a secondary contract, its existence premised on the primary contract. The consideration of a collateral contract can be, and in practice often is, derived from the signing of a primary contract. Collateral contracts have been a flexible instrument which has allowed the courts to give effect to the intentions of parties despite hurdles such as the parol evidence rule or the doctrine of privity. However, the courts have generally been hostile towards finding the existence of a collateral contract in most situations after the comments of Lord Moulton in Heilbut Symons & Co v Buckleton.6 In that case, Lord Moulton had, in obiter, recognised the existence of collateral !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 [1961] 1 QB 31 (CA). 2 [2003] UKHL 62, [2004] 1 AC 919 [1], [22] (Lord Nicholls), [87], [110] (Lord Millett), [185] (Lord Walker). 3 [1972] 1 QB 198 (CA). 4 [1919] 2 KB 243 (KBD). 5 Paul S. Davies, J.C. Smith’s The Law of Contract (1st edn, OUP 2016) 155. 6 [1913] AC 30 (HL). I OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 35! contracts, but had said that such contracts must be very rare due to their nature. More often the terms would be part of the primary contract or agreement, and that collateral contracts would be ‘viewed with suspicion by the law’. Even so, many cases often ignore or distinguish Lord Moulton’s comments, and proceed to find collateral contracts where appropriate.7 The finding of collateral contracts in such cases are very often driven by policy considerations. A good example of this would be the infamous case of The Eurymedon,8 which involved a collateral contract springing into existence to grant stevedores the benefits of limitation clauses contained within the bill of lading, a primary contract which they were not a party to.9 In a face-to-face transaction, collateral contracts are, and should be, much more common than in written contracts, particularly in light of how such negotiations tend to be concluded. The reason for this can be derived from considering offer and acceptance principles together with policy arguments. The distinction between a written contract and a face-to-face contract on offer and acceptance terms exists because a written contract automatically ‘collapses’ the negotiations into a single contract. There is hence much less of a role for collateral contracts, since the usual inference is that if a term would be enforceable, it would have been included in that single contract, as part of the parol evidence rule.10 The courts would hence understandably be hesitant to find that a collateral contract gives effect to a term not included in that primary contract unless there are facts which rebut that inference. In a face-to-face transaction there is no such unification, because this final contract does not exist in written form. There are three potential competing interpretations of negotiations in face-to-face transactions, the first two operating on a ‘collapsing’ analysis, and the last on a collateral agreement basis: 1. The negotiators are constantly making counter-offers which include as a common understanding everything that has been part of negotiations to that point; 2. The negotiators are making invitations to treat until the final offer is made, which “collapses” all of the earlier discussions into a single offer; or 3. The negotiators are creating collateral offers which may or may not be accepted, and the rejection of a collateral offer does not represent a rejection of the offer as a whole. The reason other interpretations cannot be offered is because of how offer and acceptance works. Many of these fundamental principles sit uncomfortably with face-to-face transactions, since these principles in practice apply more appropriately to written commercial contracts, which are usually indirect, well-considered, and presented in a singular or small number of documents. Here, face-to-face transactions are influenced by two principles of contract law, one applying more primarily to limit the forms of analyses, and the other applying in a subsidiary fashion to dictate the shape of these analyses. The first, primary principle is that where an offer is made, and a second offer or counter-offer is subsequently made, the initial offer would be !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 7 See Webster v Higgin [1948] 2 All ER 127 (CA) or Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 (KB). 8 [1975] AC 154 (HL). 9 See also The Starsin [2003] 2 WLR 711 (HL) where the House of Lords explicitly referred to Eurymedon (op. cit.) style contracts as collateral in nature, as well as examining how the collateral contract interacted with the bill of lading. 10 See Lord Moulton’s comments in Heilbut Symons (n 6). OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 38! The reason such an analysis was favoured by the Court of Appeal is because it avoids many of the difficulties of direct collapsing. If they had directly collapsed the contract into a single written form as the parties operated on (parties had acknowledged that there was a primary ‘framework agreement’) then it would have resulted in difficulties in giving effect to the intentions of parties. Furthermore, it allowed the Court of Appeal to strip down the contract to its essential conflict, which they did by classifying the contractual matrix as a finding of fact.24 This prevented them from being bogged down in having to consider how the relatively unexplored contractual matrix operated and allowed them to jump right into the heart of the dispute on appeal. This sort of approach would definitely be of much more assistance to a trial judge examining evidence on a complicated transaction, but even here it shows the benefits of its simplicity. Nevertheless, to reach this outcome, the Court of Appeal in some sense resorted to academic evasion in responding to the argument.25 The collateral agreement theory suggested goes further. It argues that what should have been done is to distil the primary contract down into the bare minimum amount of terms needed to sustain its existence, taking into account the factual circumstances to determine if any terms ought to fall within the primary contract, and annex the other terms to it as collateral contracts. This means that apart from a primary contract term, the courts can examine each of the other terms on the basis of their own existence, rather than worry about the difficulties of whether it would bring down the rest of the contract with it. This would be similar to the approach adopted in the Court of Appeal above, except in a much more expanded form. Of course, some of these collateral contracts may be sufficiently integrated into the primary contract that the failure of it would substantially deprive a party of its consideration under the primary contract, entitling them to repudiate. This is, however, separate from whether the term would have constituted a condition if it was part of the primary contract, which is usually much trickier to deal with. Alternatively, a collateral contract may provide the right of termination of the primary contract, which is also separate from the same. A dissected contract both allows the courts to construe each separate agreement within its own dimension, understanding that all terms within that internal area are effectively conditions for the purpose of that stage, while at the same time reducing the evidential difficulties faced by the courts in having to interpret the contract into the tripartite term classification system. The breach of a collateral contract would usually call for damages unless it can be shown to be intrinsically linked to the consideration of the primary contract. It would, in practice, lead more often to an outcome which is more in line with the intention of the parties than under a ‘collapsing’ approach. This is a better match with situations where consideration is promised during the course of negotiations and parties then modify details of the contract made after initial negotiations are concluded without subsequently promising any further obligations. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 24 As recognised above at n 21. 25 Leslie (n 17) [42]. Jackson LJ ultimately read the issue as being one centred on the form of transactions, rather than being a number of contracts issue, the latter being how it was phrased in submissions. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 39! 3. Col l a te r a l Agre e me nts a nd M a nne r of P a yme nt With the role of collateral contracts for face-to-face transactions established, its potential role for face-to-face mistake as to identity cases can now be explored. The case of Pharmaceutical Society of Great Britain v Boots26 made it clear that in a shop, the display of goods is only an invitation to treat. C would pick up the good and offer to purchase that good to the vendor, A. A would then accept the offer, and the contract would be completed when C transfers the relevant consideration. The illustration would be: C: I would like to purchase this good. (Offer) A: I agree to sell you this good. (Acceptance) C transfers money to A. (Consideration) C takes the good. (Performance of A’s obligation) A collateral agreement will be introduced into this basic transaction: ‘manner of payment’. Parties need to come to terms on key issues in order for an agreement to have been made. Chief among these is price.27 However, the manner of payment is not a key term that needs to be reached as part of the primary agreement. Indeed, there are many agreements commercially where, after the contract is signed, the contracting party would direct the other party to, for example, liaise with their secretary, in order to establish how to pay. What this means is that the manner of payment has the capacity to exist as a separate agreement in and unto itself. It is difficult in practice to claim that in negotiating the manner of payment after the primary obligations have already been agreed, any negotiation as to the manner of payment made would constitute a counter-offer that would invalidate the primary offer. However, it must be noted that there is a distinction between an agreement and a contract, a contract being an agreement supported by consideration. As long as there is no consideration, the primary agreement is not binding on either party. This does not, however, change the fact that the primary agreement exists. Hence, in a negotiation where the primary agreement is made, but parties cannot come to any consensus on the collateral agreement, then no consideration has passed. This is because C has not promised that he would give money to A, while A has not promised that he would give the goods to C. In such circumstances consideration is usually analogous with the primary obligation and the contract would only truly be locked in by the provision of the obligation ie the transfer of property in the goods or money, following which it would also lock in a corresponding promise to transfer the other (which is different from whether that is actually transferred or not). Prior to that either party has the capacity to withdraw from the primary agreement. This would be illustrated as follows: C: I would like to purchase this good. (Offer) A: I agree to sell you this good. (Acceptance) C: Am I allowed to pay by Debit Card? (Collateral Offer) A: Unfortunately, our store does not take Debit Cards. Can you pay by cash instead? (Collateral Counter-Offer) C: I do not have cash on me. (Collateral Rejection) A: I am sorry, but we only accept cash. (Enquiry) C: In that case I no longer want to purchase this good. (Rejection) !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 26 [1952] 2 QB 795 (QBD). 27 May & Butcher (n 12). OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 40! In this case, the primary offer and acceptance had already been established. However, no consideration passes between the parties. Hence, while a primary agreement has been arrived at, both A and C are able to resile from it. It is, however, imperative to distinguish the above situation from one such as this: C: I would like to purchase this good, and I would like to pay by Debit Card. (Offer) A: I agree to sell you this good, but our store does not take Debit Cards. Can you pay by cash instead? (Counter-Offer) C: In that case, I will not purchase the good. (Rejection) In this situation, the ‘manner of payment’ is incorporated as a term within the primary offer. The offer is made on the premise that the manner of payment is made in a specific form. This can be seen most clearly in written contracts. If a written contract states all of its contents within, including how payment is to be made (for example, a c.i.f. letter of credit which usually states something like ‘cash on sight within 30 days on complying presentation’) it would necessarily be part of the primary agreement and, if accepted, contract. It would be a breach of the primary contract if the manner of payment differs from what was stipulated as part of the primary offer. 4. ‘V oid ’ v ‘V oid a ble ’ : M ista ke a s to Id e nti ty By conceptualising manner of payment as a collateral contract, a distinction between ‘void’ and ‘voidable’ contracts can be envisaged in mistake as to identity cases. A ‘void’ contract exists when the primary agreement is made between A and C, rather than A and B, since offer and acceptance are made to different parties. Conversely, a ‘voidable’ contract exists when the primary agreement is made between A and B. This can coexist with a ‘void’ collateral contract which is made between A and C. The heart of the issue hence lies with the manner of payment. Two questions are presented that need to be resolved. The first is whether the manner of payment is an agreement between A and C or A and B. If it is the latter, then there is no significance whether the collateral contract exists or not. The second is whether the manner of payment is part of a collateral agreement or whether it is incorporated into the primary agreement. In the former, the primary contract would be ‘void’, while in the latter it would be ‘voidable’, ceteris paribus. For the first, the key underlying thread in all of the concerned cases (on face-to-face mistake as to identity) is that payment was made by cheque. This is important, because a cheque is an identity specific document. Cheque payments are essentially credit notes directed to financial institutions that allow a disbursement from the party who owns the cheque as evidenced by the chequebook registered in his name, to the party receiving payment, whose name is written on the cheque (A), for the amount specified on the cheque. The details on the chequebook and the verification of those details are hence an integral part of the manner of payment. In the cases that follow, this verification is generally achieved by checking the address to the name. The details form an important part within the offer and acceptance itself; when a cheque is made in C’s name, it is implied that the offeror of the cheque was C or otherwise authorised by C to do it. Only such a person can authorise a disbursement from C’s account via cheque. Hence, when B makes an offer of a cheque, he is making it in the name of whoever the chequebook is registered to, since only such a person can authorise a disbursement from that account. This name can be either B or C. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 43! Here there was never any valid collateral agreement that existed together with a primary agreement. This was because A had rejected the primary agreement before receiving the collateral offer (at the point where the cheque book was produced). In order to resume negotiations, it was necessary for B to include the manner of payment within a primary offer. It was particularly helpful that A stated in very clear terms a desire to cancel the agreement at the point that the cheque book was produced. Once an agreement is cancelled, it can be in no better position than if a counter-offer was made to an offer: the initial offer by B would no longer be available for acceptance by A. This meant that the third primary offer made would contain both the manner of payment, the price, and the subject matter. This was accepted by A with respect to C, since A accepted with an understanding that the cheque was valid in C’s name. As a result of this, there was no offer and acceptance, no valid agreement, and the contract is hence ‘void’. In Ingram v Little, the Court of Appeal analysed the case relying on offer and acceptance. The court, even the dissenting Devlin LJ, contended that it is important to rely on the circumstances to construct the offer and acceptance, which is undoubtedly correct. 36 The majority concluded that A did not intend to accept the offer with respect to B, but instead to C.37 The weakness of the judgment, however, was that their conclusion here was left far too open-ended. The phrasing of offer and acceptance was made in particularly broad terms, and this thereby leaving their analysis open to attack on the basis of breadth. In an identity analysis, it is necessary to draw the connection back to why the specific identity of the purchaser is an important circumstance to be taken into account. The only reason why the court could make an effective analysis on identity is because identity is a fundamental part of the manner of payment here, a cheque payment. Once they could come to such a conclusion, it makes sense that this identity specific component must be a part of the primary contract itself to make that contract void. Otherwise, their outcome could not have been reached. Taking that into account, the Court of Appeal here would have needed to ask themselves the question of when the identity specific component is or is not part of the agreement and why. This would have set a natural limit for their arguments. This was, however, not achieved by the Court of Appeal. As a result, subsequent cases were naturally able to constrain the scope of Ingram v Little’s dicta. As a result, the majority of the Court of Appeal failed in their analysis on two levels. Firstly, they failed to identify why A did not intend to accept the offer with respect to B, but instead to C. Secondly, they failed to identify why this identity-specific circumstance should be taken to be a part of the agreement. The solution suggested here is a collateral agreement framework, since it squarely reconciles the cases in this field. Despite the analytical failure of the Court of Appeal, through the analysis provided in this article, it is submitted that the outcome of Ingram v Little was nevertheless correctly decided. By incorporating an identity-specific term, the manner of payment, within the primary agreement or contract, it redirected the target of the offer or acceptance to that specific individual, meaning that by offer and acceptance, that primary contract would be “void” because the offer and acceptance were made to different parties. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 36 Ingram (n 1) 48-49, 54 (Sellers LJ), 56 (Pearce LJ), 63-64 (Devlin LJ). 37 ibid 49-50 (Sellers LJ), 59-62 (Pearce LJ). OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 44! 6. Conclus ion In conclusion, the article relies on the following propositions: 1. Face-to-face transactions rely on the existence of collateral agreements and contracts to give them a sensible framework in context; 2. ‘Manner of payment’, if dealing with identity-specific forms of payment like cheque payments, redirects the target of an offer or acceptance away from a more general model (offer or acceptance to either B or C) to an identity specific model (offer or acceptance to C); 3. ‘Manner of payment’ can, depending on the facts, be either part of the primary agreement or a collateral agreement; and 4. The difference between the cases dealing with unilateral mistake as to identity is best understood by deciding whether the manner of payment is incorporated within the primary agreement or a collateral agreement. As a result, on account of these propositions, by paying attention to the specific negotiations within each case, Ingram v Little was not wrongly decided, and the outcome of the case can be reconciled with the other cases in this area.