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New Zealand Yearbook of New Zealand Jurisprudence |
Last Updated: 24 April 2015
The Legal Framework for the
Provision of “Quotes”: A Preliminary Exploration of Law and Practice in New Zealand
Dr. Philippa K. Wells*
i. intrOdUctiOn
The (relatively) recent expansion of consumer-centred legal rights in New
Zealand highlights the importance for those involved in
providing goods and
services to both be aware of their legal responsibilities involved in such
provision, and to factor legal risks
into their decision-making (with the
cumulative outcome of such practices sometimes being referred to as compliance
programmes).
The provision of “quotes” or “quotations” by those
involved in the service industry sectors in particular
highlights legal issues.
While there is little comprehensive research that reveals how responsibility and
risks are managed by those
providing quotes in this context, ad hoc evidence
suggests there is a growing tendency to reflect uncertainty in prices, duration
and costs. This tendency challenges a belief held in some sectors that a quote
can be relied upon as a fixed price, and has the potential
to reduce the ability
of the consumer to question the final outcome or a court or tribunal to
establish a fair price.
A colleague and I are conducting empirical research (through questionnaire)
into the accepted meaning(s), use and implications of
“quotes” in
New Zealand. This paper is an attempt to explore judicial opinion and statutory
provisions of relevance as
a means of establishing background and framework for
that empirical research. This is achieved by way of scenario-based discussion
involving questions to be considered in that analysis.
ii. Setting the Scene
Jim and Jane own an old villa in a good part of town. After saving for a
couple of years and coping with the less than ideal living
conditions, they are
ready to carry out such renovations as are necessary, desirable and within their
price- range to improve the
surroundings and the capital value of the property.
These renovations include repairs to external walls and extensive upgrading to
the interior. At the local home-show they collect some brochures from builders
who offer free written quotes. Several of these come
round in the
following
* Senior Lecturer in Law, Faculty of Business, Auckland University of
Technology.
week to give them a price. All the quotes come in well above what they were
expecting to pay. Bob’s is the lowest. Best of all,
he can start straight
away with a stated completion three months later. Once Jim and Jane persuade the
bank to advance the shortfall
everything is set to go.
From the beginning things go awry. Bob has taken on another job at which he
seems to spend most of his time. In the meantime, with
the jumps in the cost of
fuels, the papers are full of doom and gloom predictions and reports of hefty
increases in the prices for
goods and services. In addition, Jim and Jane are
put to considerable inconvenience when winter comes and the house proves too
cold
to stay in. Taking into account the amount needed to service the loan from
the bank, they calculate that they can just afford to
rent accommodation until
the week the work on the house is supposed to be completed.
Things will be tight but they have worked out their budget very carefully.
Even with the rent they can just manage to pay the quoted
price, the fixed price
for the work that was agreed to. They did not ask for or agree to anything extra
or different, and therefore
the quoted price is all they have to
pay...right?
Not so fast. An interesting thing about quotes is that despite a commonly
held understanding that the term signifies a fixed price
(and its description as
a “firm” offer in the standard terms and conditions published by
some suppliers of goods and
services) there is no legal magic associated with
the term. Instead, the understanding the parties had or should have had, the
words
used and the circumstances surrounding the quote are all potentially
subject to scrutiny.
The balance of this paper explores the legal status and treatment of a quote.
The next section (section three) provides justification
for the exploration,
while section four makes reference to statutory and case law in considering
alternative approaches to dealing
with relevant legal issues.
iii. JUStiFicatiOn FOr ScOpe: QUOte FOr ServiceS
Establishing means of dealing with the disparity between quotes and final
price is an issue for providers both of goods and services.
However, it is at
least arguable that the issues are greater for providers of services than for
suppliers of goods. Several reasons
can be advanced as support for this
claim.
Prices for goods are often easier to determine and are also likely to be more
stable over time. It is also relatively straightforward
to provide for price
escalation clauses in pricing structures for goods. By way of contrast, services
involve greater levels of price
volatility and uncertainty; time allocated to
execution and complexities involved may be the subject of assessments,
guesstimates
and calculations rather than of certainties. Comparative
pricing
information available to both service provider and client may also differ
from that available in the case of goods; there is greater
potential for
variations in the interpretation and calculation of work to be done than in
specifications for product. Seeking consistency,
and therefore greater levels of
certainty in pricing through adherence to industry-based standard costings and
guidelines for work,
may be deemed price fixing and subject to scrutiny as an
anti- competitive contract, arrangement or understanding (as in the case
of fee
schedules for law practitioners).1
Another potential point of distinction is the project focus frequently
associated with the supply of services. In a legal environment
that encourages
specialisation (under, for example, the Building Act 2004), a contractor in a
project setting is likely to act as a clerk of works, assuming the
responsibility of identifying and hiring subcontractors
to provide specialist
services. With increasing possibilities of uncertainty over what costs will be
finally involved in this situation,
a contractor is faced with the need to
manage those costs, in particular establishing mechanisms whereby the legal
responsibility
of the contractor for overruns on the part of subcontractors may
be minimised.
Duration also raises potential issues: the provision of a single service may
take place over an extended period, further increasing
levels of uncertainty as
to the costs involved. This can be compared to the situation with goods that may
involve a single supply
at a specified or ascertainable date, or alternatively a
series of supplies that take place either over a period or from time to
time
(specified or in response to demand). Either way, it would be unusual if a price
or a formula for determining the price to be
charged on later supplies was not
included in the contract.
These characteristics of the supply of services (changing costs, complexities
and extended duration) take on added significance in
a legal environment in
which the relative contractual powerlessness of consumers is acknowledged, where
there has been a trend towards
the codification or statutory clarification of
various aspects of general contract law, and where there is at least some move
towards
a consideration of the circumstances of a contract rather than just the
wording of the contract itself (eg, with the common law development
of a concept
of unconscionability).
With reference to three discrete variations to the above scenario, the next
part of this paper incorporates an exploration of how
this legal environment may
impact on the nature of a quote as a fixed price on a specific
contract
1 New Zealand Commerce Act 1986, ss27 and 30.
for services. The discussion then highlights legal issues and questions to be
considered and provides a legal framework for the analysis
of empirical
data.
iv SpeciFic SitUatiOnS
Scenario Variation One
As time goes on, and after talking to people who are getting similar work
done, Jim and Jane suspect that Bob pitched his price low
in order to win the
contract (sometimes known as low balling). At the time he provided the quote the
building industry was going
through a slump. Now the building industry is
booming, and there is an industry-wide shortage of skilled workers. In the
course of
several on-site discussions with Jim and Jane, Bob makes veiled
reference to the impacts wage and other increases are having on the
cost of the
work. In the last of these discussions he asks whether Jim and Jane have read
the terms and conditions of the quote that
were printed on the back. They had
not, but on doing so they are dismayed to find a clause which states that
“the contractor
reserves the right to alter the quoted price to take
account of increases in the input costs of labour, goods or overheads.”
Another clause at the bottom of this page reads: “By accepting and signing
the written quote, the Client indicates their acceptance
of all standard terms
and conditions as stated above.”
Discussion
If the [price escalation] clause provisions are clear and unambiguous, and
claims for extra payment are supported by evidence of cost
increases, it is
prima facie reasonable to assume they would be upheld, despite Jim and
Jane’s failure to read it prior to
signature. However, do suspicions of
low balling provide a defence to any claims Bob might put forward for extra
payment?
The Fair Trading Act sections 9 (misleading and deceptive conduct in trade),
11 (misleading conduct in relation to services) and 13(g) (false or
misleading representations in relation to prices) may be relevant.
However, it
would of course be necessary for Jim and Jane to establish their case. First,
s9. The decision in AMP Finance v Heaven,2 establishes a
three-step test that must be satisfied in such a case. First, was the conduct
capable of misleading? Secondly, was the
reliant party misled by the relevant
conduct? Finally, was it reasonable for that party to have been misled? It is
arguable that
Jim and Jane relied on Bob to apply his knowledge and expertise in
arriving at the appropriate price for the work. However, consideration
would
also have to
2 (1997) 8 TCLR 144, 145.
be given to whether Bob could argue that the presence of an escalation clause
refuted any suggestion that the quoted price had the
potential to mislead or
deceive. More specifically, it is at least arguable that the escalation clause
gave Jim and Jane due warning
that the quoted price was subject to fluctuation,
and to that extent either they did not rely on the quote, or that it was
unreasonable
for them to do so.
On further analysis, section 11 appears inapplicable. Although it makes
reference to misleading conduct in relation to services, its
wording is similar
to the Australian Trade Practices Act 1974 section 55A and is correspondingly
limited to particular types of misleading conduct. Statements or representations
as to price are
not included. Evidence as to intent is also required before it
can be successfully argued. (Perhaps this is why this section has
been cited
relatively rarely.)
Section 13(g) refers to false or misleading representations relating to the
price for any goods or services. It has been judicially affirmed that
no mental
element is required to hold the representor liable3 but only the
representation must be likely to mislead.4 However, proving a false
or misleading representation is not easily done. At the very least, Bob’s
original pricing statements
would need to be clearly out of line with the
industry norm or those of other providers. It is also arguable that the success
of
such an action would be doubtful in the context of the escalation
clause.
As well as the Fair Trading Act there is the Consumer Guarantees Act 1993.
Section 31 of this Act provides that a consumer need only
pay a
“reasonable price” for services. However, this provision only
applies where the price is not determined or left
to be determined in accordance
with the contract or course of dealing between the parties. These provisos
together with the escalation
clause in the quote would appear to deny Jim and
Jane relief under this section. The only other possibility may be section 28
–
a guarantee of reasonable care and skill in the supply of services
(where services are defined in section 2 as including “any
rights,
privileges, or facilities...under...(a) a contract for...(i) the performance of
work.” The application is likely to
turn on the question of whether a
price provided in the quote is a “right, privilege or facility”...
“under”
the contract.
Given the above discussion, I suggest that three main questions emanate from
this scenario.
3 Commerce Commission v Noel Leeming Ltd [1996] DCR 311; Marcol Manufacturers v
Commerce Commission (1991) 2 NZLR 502.
4 Commerce Commission v Telecom Corporation of New Zealand Ltd
(1990) 4 TCLR 1.
1. If the subject matter of the contract were principally labour, would
increases in costs justified by increases in the labour-cost
component
ultimately render the quote meaningless? Does this then raise questions as to
certainty of contract and consensus?
2. To what extent does the existence of a price escalation clause affect the
ability of Jim and Jane to rely on the implied guarantees
provided under the
Consumer Guarantees Act sections 28 and 31?
3. What evidence would be needed to support Bob’s claim that his price
escalation clause allowed him to charge the extra costs
involved in completing
the contract?
Scenario Variation Two
The work does not appear to be progressing with any particular haste. Half
the weatherboards are off the walls, the roof is covered
with a tarpaulin and
the inside has barely started. Each time Jim and Jane raise the subject of the
house with Bob, he assures them
things will get done by the deadline stated in
the contract. Three weeks before the completion date Bob contacts them. He
explains
that he has lost two of his best builders to a competitor. To get the
house completed by the date stated, or anything like it, he
will have to pay two
replacement employees 10% above what his other workers receive. As his quote was
based on the rate for builders
at the time he submitted it Jim and Jane will now
need to pay extra.
Discussion
Two issues potentially arise; the first being the enforceability of
pre-existing contractual obligations as good consideration for
a fresh promise.
There is plenty of precedent for the legal principle that a pre-existing
contractual obligation is not good consideration
to support a fresh promise (the
so-called sailor cases such as Stilk v Myrick5) and more
recently, Cook Islands Shipping Co Ltd v Colson Builders Ltd.6
However, the decision in Williams v Roffey Bros and Nicholls
(Contractors) Ltd7 (followed by the New Zealand High Court in
Machirus Properties Ltd v Power Sports World8) indicates that
the courts are willing to uphold such variations in agreements if the person who
agrees to pay more would either
obtain a benefit or avoid a problem thereby, and
provided there is no duress or any other vitiating element that may
taint
5 [1809] EngR 552; (1809) 2 Camp 317.
7 (1991) 1 QB 1.
8 (1987) HC, Wellington, AP 347/96, 26 May 1998.
that agreement. On the basis of these cases, and the “relaxed
attitude”9 they reflect as to the need for further
consideration, a promise by Jim and Jane to pay Bob extra to get the job
completed would probably
be enforced. Jim and Jane, by agreeing to pay more to
get the job completed by the date for which they have planned and budgeted,
would gain a benefit in getting the work completed within the time specified,
allowing them to move back and stop paying rent.
The second legal issue arises from the effect of Bob’s admission that
he is now unable to complete on time (in accordance with
the terms of the
original contract). Under the Contractual Remedies Act 1979, Bob’s
statement could at least be deemed anticipatory
breach. The date for completion
is three weeks away; without a promise of more money the work will clearly not
be completed by this
time.
Whether or not Jim and Jane could exercise the extra-legal remedy of
cancellation under section 7(4) would turn on the nature of the
statement as to
the time of completion. In other words, was time a term expressly or impliedly
of the essence10 or alternatively, in accordance with s7(4)(b), is
the effect of the declaration of Bob’s (anticipated) inability to complete
by that date (i) substantially to reduce the benefit, (ii) substantially
increase the burden, or (iii) make the benefit or burden
substantially different
from that originally agreed by Jim and Jane?
Time is of itself not considered of the essence under s7(4)(a). Bob could
argue that with all project-based contracts, it is reasonable
for all parties to
accept that the ability of the contractor to complete on time is subject to many
external and unpredictable factors.
Furthermore, a lack of penalty clauses for
failure suggests that the specified date was more in the line of an expectation
rather
than an essential requirement.
Will the failure to complete then be sufficient to render the benefit or
burden to Jim and Jane substantially different to what was
quoted? After all,
they have had to rent, a cost that will be increased should they need to remain
in rental accommodation for an
extended period of time. However, they did not
make the decision to move until AFTER they accepted the quote. Arguably,
therefore,
the reduced benefit/increased detriment is not linked to the
anticipatory breach but is rather a decision made independently of the
contract
incorporated in the quote and with the objective of increasing comfort
levels.
9 Borrowdale, A (ed.) Butterworth’s Commercial Law in New Zealand 4th Ed (2000) 35.
10 Contractual Remedies Act 1979, s7(4)(a).
In the event, there are pragmatic reasons why Jim and Jane would hesitate in
exercising a right to cancel the contract anyway. They
would have to locate
another person to complete (and probably pay more anyway). If time was not
considered of the essence or even
as an important term by the Court, they may be
deemed to have repudiated the contract, opening the door to Bob to cancel and
claim
substantial damages for consequential losses.
On that basis, affirmation and damages, or Specific Performance would appear
prima facie more useful remedies. However, questions
would also be raised both
as to quantum of damages (what costs have been suffered by Jim and Jane as a
consequence of the anticipatory
breach) and also the benefit to be derived from
an order for Specific Performance. More specifically, if Bob can show he does
not
have the staff and cannot afford to pay for them, is it reasonable and
appropriate to order SP? Significantly in this context, Rigby v
Connol11 and Thomas Borthwick & Sons (Australasia) Ltd v
South Otago Freezing Co Ltd12 reflect a legal principle that any
order for Specific Performance will be made only after consideration of the
relative benefits and/or
detriments it will bring to the parties concerned. If
the detriment on the performing party is out of proportion to the benefit gained
by the other party, Specific Performance will not be granted.
Given the above discussion, I suggest that the following questions emanate
from this scenario:
1. What is the contractual status of the quote?
2. To what extent is it possible to vary the agreement in the interests of
common sense and commercial reality, yet maintain the
contractual status of the
original quote?
3. Would the fact the couple qualify as consumers make any difference to
this situation?
4. What courses of action are available to the contracting parties once it
becomes apparent that the terms of the original quote
cannot be
satisfied?
Scenario Variation Three
Bob and his employees have been working on the house for some weeks. One day
Bob rings and explains that at the time he submitted
the quote he was under
considerable stress and had not been sleeping. As a consequence,
when
12 [1978] 538.
he carried out the pricing calculations on his spreadsheet he had erroneously inserted a figure of 300 person-hours instead of 400 to complete the job. This mistake meant that the total price for labour included in the quote was some
25% less than it should have been. As labour costs presently represent 75% of
the total price, a corrected figure for person-hours
will add some $80,000 to
the price. He also points out than when he was discussing the job with Jim and
Jane before submitting the
quote, he had mentioned that he thought the job would
take around 400 hours. Consequently, he believes they knew of his mistake and
had taken advantage of it when accepting his quote.
Discussion
Of potential relevance to this scenario is the High Court decision in
March Construction Ltd v Christchurch City Council.13 An
action by March under the Contractual Remedies Act (silence amounting to
misrepresentation) and the Fair Trading Act (silence amounting
to misleading or
deceptive conduct) failed, as a duty on the part of the Council to alert a
tenderer as to a likely miscalculation
was not established.
It is suggested that if Bob relied on similar arguments in seeking recovery
of the extra $80,000, Bob would fail. However, an alternative
that may be open
for Bob is to seek relief under the Contractual Mistakes Act 1977. This option
was not available to the plaintiff
in March, despite Williamson J’s
obiter remark that the “case was truly one of mistake and accordingly is
governed by the provisions
of ss4 to 6 of the Contractual Mistakes Act
1977,”14 because in both the Conditions of Tender and
Conditions of Contract provided by the Council, March had assumed the risk of
mistake.
In addition, the plaintiff’s claim for rectification failed as
there was not a mistake in the contract itself but rather in
the preliminary
calculation of the tender price.
Is this option available to Bob? To obtain relief under the Contractual
Mistakes Act 1977, the plaintiff has to prove two things.
First, an actionable
mistake that is either (i) unilateral, (ii) common or (iii) mutual, must have
been made by the party making
the application for relief under the Act.15
Bob has made a mistake that is arguably material to him given that a
reasonable business person would not have submitted such a low
tender. As there
is no evidence that Jim and Jane have made any mistake, the situation would
appear to fall into the first of these
categories - unilateral mistake. However,
such categorisation raises another issue. S6(1)(a)(i) requires knowledge of the
mistake
on the part of the other party. Whether Bob can prove that is
uncertain.
14 Ibid, 405.
15 Contractual Mistakes Act 1977, s6(a).
As McLauchlan16 emphasises, both the committee driving the reform
of the law of mistake intended17 and the Court of Appeal has
held18 that constructive knowledge on the part of another party to
the contract of a mistake is not sufficient; actual knowledge is required.
The
Court of Appeal’s rejection of the argument in Tri-star that
constructive knowledge in a case of unilateral mistake was adequate must
therefore be considered highly relevant to this scenario.
Consequently, Bob
would be faced with the need to prove both that the alleged oral communications
took place, and that it would be
reasonable to hold that Jim and Jane understood
the implications of the time estimates made by him such that actual knowledge on
their part of Bob’s later mistake could be assumed.
Secondly, a plaintiff seeking relief under s7 must demonstrate that the mistake resulted in a substantially unequal exchange of values,19 or a benefit or burden substantially disproportionate to the consideration.20 Arguably, in this regard, an $80,000 miscalculation could satisfy both requirements. After all, it represents 25 percent of the labour component, which in turn makes up
75 percent of the total contract price. However, there remains a further two
issues implicit in the wording of section 7; firstly,
the Court in exercising
its discretion to grant relief “shall” take into account the extent
to which the party seeking
the relief caused the mistake,21 and
secondly, a subjectively determined consideration of “justice” is
imported into any exercise of this discretion.22
In relation to the first of these implications, in Snodgrass v
Hammington,23 the Court of Appeal upheld the High Court decision
that a mistake could be brought about by negligence on the part of a contracting
party, and that that negligence would therefore be material in determining the
award and level of relief. In addition, both Courts
rejected the arguments of
the (negligent) appellants that the behaviour of the respondents (in refusing to
settle on a property subject
to subsidence problems) disentitled the respondents
to relief. In relation to the second implication, the Court of Appeal in
Chatfield v Jones,
16 McLauchlan, DW, “More on the Contractual Mistakes ‘Code’” (2003) 9(1) New Zealand
Business Law Quarterly 51, 58-59.
17 Contracts and Commercial Law Reform Committee (1976) Report on the Effect of Mistakes on Contracts, Wellington: Department of Justice, para 20.
18 Tri-star Customs and Forwarding Ltd v Denning [1998] NZCA 261; (1999) 1 NZLR 33.
19 Contractual Mistakes Act 1977, s6(b)(i).
20 Ibid, s6(b)(ii).
21 Ibid, s7(2).
22 Ibid, s7(3).
stressed that “in administering the [Contractual Mistakes] Act the
integrity of written contracts, particularly in commercial
dealings, must be a
cardinal consideration.” 24
The principle of holding contracting parties to their bargain, however
unattractive it has become to one of them, is a longstanding
principle in the
common law and is unlikely to be lightly disturbed. Consequently, a Court if
called upon to consider whether it
is “just” for Bob to obtain
relief under the Contractual Mistakes Act would take into account not only his
conduct (the
negligence itself and the time-lag involved in communicating the
error), but also the behaviour of Jim and Jane (the calculations,
recourse to
the bank for extra funds and their budgeting for accommodation). Given the above
discussion, I believe that three main
questions emanate from this
scenario.
1. Does such a significant miscalculation in price render the quote, reflected
in the contract, effectively worthless?
2. If so, would cancellation or similar remedy provide an appropriate and
useful outcome to the parties concerned? Would the innocent
party suffer
disproportionately as a consequence of the breach or mistake?
3. Should matters of wider importance such as ruin (Bob) and relative
expertise be of relevance in determining the nature and quantum
of
relief?
iv. cOncLUSiOnS
In this paper I have sought to identify and explore legal issues and
implications arising from the deceptively simple and ubiquitous
area of the
commercial quotation. The scenario outlined at the beginning, along with the
three specific variations considered, provides
a context in which to highlight
these legal issues and implications, and that in turn sound a warning as to the
importance for provider
and client alike to be aware of their legal rights and
obligations. As such, this paper establishes a legal framework in which to
consider relevant management practices observed by those providing services
pursuant to quoted prices and other contract
terms.
24 (1990) 3 NZLR, (per Cook P) 287.
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