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Wells, Dr Philippa K --- "The legal framework for the provision of 'quotes': a preliminary exploration of law and practice in New Zealand" [2006] NZYbkNZJur 15; (2006) 9 Yearbook of New Zealand Jurisprudence 227

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.

6 (1975) 1 NZLR 422.

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

11 (1880) 4 Ch D 482.

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.

13 (1995) 6 TCLR 394.

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 (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).

23 (1995) 10 PRNZ 672.

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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