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No turning back
18/03/2008 The Star ARTICLES OF
LAW by BHAG SINGH
A BUYER, having placed an order with one party that is able and willing to
perform its obligations may then meet a supplier who can supply the same at
a cheaper price. Can the buyer just decide not to go ahead with the
transaction? Very often, a transaction is entered into by merely asking for
a quotation and accepting it.
Then one party meets another that can provide the same goods or services at
a substantially lower price. There may be a temptation to switch dealings.
This may be encouraged by the fact that as yet no goods have been received
or services rendered nor any deposit or part payment made.
However, a “switch” may not be as inconsequential as that. A person who is
unfamiliar with essential contract principles may not always realise the
effect of even an informal exchange of communications or correspondence. A
seemingly casual exchange can lead to a serious binding commitment.
ABB Distribution Sdn Bhd v. GKM Development Sdn Bhd & Anor is an example.
The defendant GKM Development wrote to the plaintiff ABB Distribution
confirming acceptance of their offer to supply install and commission an
11KV switchboard at a cost of RM1,450,000 and to deliver within seven weeks.
In their letter they said: “We are in the process of raising the bank
guarantee and in the meantime would appreciate if you could proceed with the
order to ensure early delivery of the equipment.”
There was also a paragraph that said that their consultant would finalise
all the relevant details with the plaintiff.
Relying on this, the plaintiff proceeded to order the switchboard from
Sweden.
A month later, the defendants changed their mind and wrote to the plaintiff
to say that they did not wish to proceed further with the purchase and
regretted any inconvenience caused. The plaintiff took the stand that the
defendant could not just pull out like this. There was a binding contract
and the action of the defendant was an attempt to repudiate the contract,
which they were not prepared to accept. Repudiation occurs when one party
refuses to go ahead with what has been agreed to. If the other party refuses
to accept the repudiation then the contract continues to exist and the other
party could insist on its performance.
They insisted that the defendants take the equipment and pay for all the
expenses arising from the refusal to take delivery. This, the defendants
failed to do. So an action for the price of the goods, customs duties, sales
tax, freight charges, customs clearance costs and warehouse and storage
charges followed.
The central issue
The Court had to consider whether there was any concluded contract between
both parties. The evidence disclosed that the plaintiff’s offer had been
accepted on the basis of the terms set out in and accompanying the quotation
for the supply installation and commissioning of the equipment.
The defendants tried to back out of the arrangement on the basis that the
bank guarantee was yet to be obtained and issued. They now said that there
was no agreement between the parties and that the parties were still in the
process of negotiations.
The defendants argued that they had not breached any agreement with the
plaintiff and that any loss suffered by the plaintiff was due to its own
conduct. It now became the argument of the defendants that the actual
transaction and purchase was conditional upon their obtaining a guarantee
and only then would an agreement come into effect.
The court rejected this argument and held that there was already on the
evidence a binding contract between the parties which the defendant could
not resile from. Having so held, the court ordered the damages to be
assessed.
Considerations involved
In a situation like this, the court construes the correspondence exchanged
between the parties and decides what was the result intended by the parties.
But what about the condition pertaining to the bank guarantee? The concept
of a condition precedent involves the need to fulfil a specific condition
before the mutual obligations come into force.
In this case the contract was already created but it applied to the
obligation to install the equipment. If the bank guarantee was not in place,
the plaintiff could hold back the installation.
Hence the words used in the creation of a contract and how they are used is
very important. If any party does not want to be bound until the bank
guarantee has been obtained, this should be expressly stated. It does not
matter that the contract is a formal document or an exchange of
correspondence.
When all that needs to be agreed to has been agreed, a binding relationship
comes into existence and the obligations created must be honoured. If any
qualifications are desired, then these ought to be clearly stated. When
there is no single document to record such terms, their existence need to be
strictly proved.
And the lesson to be learnt is that pulling out of a firm commitment for the
sake of making a bigger profit could very well convert a profitable
transaction into a losing one. |
