BAO2202 Financial Accounting

Discuss the concept of decision-usefulness of financial information. Explain how fundamental qualitative characteristics* of financial information contribute to the decision-usefulness of financial statements (Use at least two research articles from academic journals).

On 19 February, Josie offers to sell Sam her water colour picture of sunflowers for $ 800 which she originally offered at $ 900 and Sam counter offered to buy at $ 700. Josie offers to keep the price of $ 800 firm up to midnight on 21^st February.  Meanwhile on 20^th Wendy buys the said picture for $900 itself. Josie then revokes her offer on 20^th February through a telephone answering machine but Sam never received the revocation message. Sam telephones his acceptance to buy at $ 800 at 10 am on 21 February but could not complete the call due to telephone fault. Hence Sam send his acceptance by post at 11 am on 21^st February and the acceptance letter arrives on 23 rd February. The issue now therefore whether Josie’s was a valid revocation of offer and Sam’s was a valid acceptance and whether there is a binding contract with Sam for Josie.  

Rule

In order to decide that there is a binding contract, rules of regarding revocation of offer and acceptance must be examined. The general rule is that whenever a counter-offer is made, the originally offer is deemed to be destroyed, for all practical, as well as legal, purposes. This is so because the law does not recognize qualified acceptance. An acceptance must be absolute and unconditional. Thus, in case an offer is replied with a fresh offer, then the previous offer ends, and the fresh offer subsists to be accepted or revoked.

In the instant case, Josie first makes an invitation to treat to the Sam, whereupon he accepts the invitation and makes an offer, which is rejected by Josie, then Sam makes a qualified offer to Josie, but ultimately, Josie writes that she is making an offer to Sam. Thus, in this case, ultimately the offer moves form Josie to Sam. \in this case, the postal rule is relevant. The postal rule says that for any communication to be effective, it should be made to the other party clearly. In any case, Sampe did send his acceptance to Josie but that was after the deadline. But, then again, a conditional offer, or acceptance is no acceptance, thus there is no contract in this case.

Courts implement this policy through the terminology of offer and acceptance although it may be at the cost of further undermining of the underlying principles of responsibility. Courts place obstacles in the way of revocation of offers so as to conclude that the acceptance was completed prior to the revocation of the offer. The rule adopted by the court is therefore that the offeror must communicate any revocation of an offer to the offeree.  In Byrne & Co v Leon van Tienhoven & Co, the defendant posted a letter from Cardiff to New York offering to sell 1,000 boxes of tinplates at a given price. Before the letter reached New York, the defendant posted a revocation of the offer informing that there had been regular panic in the tin plate market causing prices to increase by 25 %. The claimant in New York accepted the offer by post when it arrived and the letter of revocation was received only later. Lindley J held that revocation of the offer was inoperative until it was communicated to the claimant resulting in the claimant’s succeeding in accordance with the postal acceptance rule. Therefore, the revocation rule prevents the offeror to take undue advantage of the market trend. Lindley J stated that common law principles required that ‘a state of mind not notified cannot be regarded in dealings between man and man’.

This is subject to the rule the letter of acceptance completes the transaction once it is posted and not when it arrives in the hands of the offeror.   In Tallerman & Co Pty Ltd v Nathan’s Merchandise, Dixon CJ and Fullagar introduced an element of intention on the part of offeror that he contemplated and intended that his offer might be accepted by doing that act.  However, it was held in Entores V Miles Far east Corporation, it was held that if the offeree could not hear the communication or the phone goes dead, there is no revocation as it was not received. But if a message of revocation is sent to the offeree, communication is deemed to have taken place whether read by the recipient or not. Although this was held in a particular case law regarding a telex message viz Brinkibon V Stahag Stahl  , a parallel situation cannot be drawn in the instant case where telephonic answering system has no written form of communication.

Conclusion

In such circumstances, it is clear that there was no binding contract at any point of time. There were only offers and counter-offers with no corresponding acceptance, thus a contract did not arise in any case. Again going by the decision of the court in various cases such as Felthouse v Bindley and Carlil v Carbolic Smoke Ball Co, it can be safely concluded that there was no concluded contract at any time.

Damages interests are expectation or reliance. Expectation interest puts the promisee in a position he would have been had the contract been performed. Reliance interest puts the promisee in the position he would have been had the contract never been made. The injured party has the right to damages based on his expectation interest. The loss incurred by the injured party caused by the failure of the other party in addition to other loss incidental and consequential loss due to breach minus cost or other loss the injured party has avoided by not having to perform.

In the instant case, Sam would have been benefited by $100 had the offer not been revoked by Josie. Josie is therefore liable to pay Sam $ 100 plus incidental expenses incurred by him.

Pinnel’s case rule states that payment of a reduced amount to satisfy a greater amount cannot amount to satisfy the whole without proper qualification. 

The facts of the case:

 Pinnel sued Cole for payment of 81.10 s in an action of debt on bond on 11 November 1600. Cole stated that at the request of the plaintiff Pinnel on 1 October paid a lesser sum which Pinnel accepted in full satisfaction of the debt of 81.1 s. The decided that it could not be in satisfaction of the whole sum. But the gift of a horse, (c) hawk or robe in satisfaction is good since it might be more beneficial to plaintiff in some circumstances as otherwise plaintiff would not have accepted the lesser sum in full satisfaction. Thus, acknowledgment of satisfaction by deed can bar a further claim even without anything being received. The rule in Pinnel’s case has been applied in the following cases.

In Fokes v Beer HL , Mrs Beer had been given judgement to recover from Dr Foakes  £ 2090.19 s. Dr Foakes asked for time which was agreed to by Mrs Beer. Thus Dr Foakes acknowledged the debt and paid partly immediately £ 500   undertaking to pay balance @ £ 150 once six months which Foakes complied. However judgment debts carried an interest which court held that Mrs Beer was entitled to receive. Since Dr Foakes did not buy her promise not to take further action as he did not provide any consideration.

In Collier v P & M J Wright (Holdings) Ltd,  the claimed contested the order to set aside a statutory demand as he had compromised a claim by creditors. This was by invoking rule in Pinnel’s case.

In Williams v Roffey Brothers & Nicholis (Contractors ) Ltd , the defendant gave a sub contract to the Plaintiff at a prohibitive price that put the defendant in financial difficulties and there was also a risk that the plaintiff leaving the work incomplete.

In Re Selectmotive Ltd, the company appealed an order for its winding up on the ground that debt was disputed since a accommodation had been reached with the Revenue. The court declined to take into account of the promise to the Revenue.

In Chelsea Building Society v Nash, the customer who was the defendant appealed against an order to pay a sum under a joint mortgage. She claimed that the full and final settlement with her husband and the joint mortgagor had the effect of releasing her from the joint mortgage.

Pinnel’s case is an important precedent in English contract law on the doctrine of part performance.

The Pinnel’s rule was different from the ruling in respect of the above cited Williams v Roffey  wherein the Court of Appeal held that performance of an existing obligation could be good consideration that conferred some additional benefit than was originally envisaged.  The subcontractor who asked for additional remuneration to do the previously agreed work held to be entitled as otherwise his bankruptcy would not have been avoided, thus constituting a practical benefit.  Though this decision has been criticised, it has not been over ruled.

The most notable exceptions to the Pinnel’s case are settlement in litigation by parties compromising on a lesser payment than is due. Payment of lesser sum could also be justified in exchange rate fluctuations, advancing of time of repayment or changing the place or manner of payment. It is in tune with the long established rule that court would look into the adequacy of the consideration. That is, if the creditor accepts 50 pence in the place of one pound to get the money just one week earlier, although it is foolish, the court would not interfere. The rule also will not undermine novation contracts by which lesser sum is agreed upon to be received.

More recent cases include Ferguson v Davis  and Re C (Debtor) 

Apart from the exceptions to the Pennel’s case, there are two other common law exceptions at common law and one in Equity.

1. Part payment of the debt by a third party.
2. Composition agreements.
3. Promissory estoppel.  

A: A promise to satisfy a whole debt in full  by a smaller sum agreed to by creditor is binding on him where  third party is making a payment to that effect and as a result the original debtor is released from the obligation to pay the full sum due as held in Hirachand Punamchand v Temple  . In this case father paid to the money lender a lesser sum in satisfaction of the full amount owed by his son, The lender later sued for the balance which the court as a fraud on the father as the part payment was a valid consideration.

B: An agreement between a debtor and his several creditors to agree for a prorate sum of debt in full satisfaction of their respective whole debts. For example 50 p in the Pound. Although there is no consideration, the court will not allow one creditor to sue the debtor for the balance amount due. This was ruled in Wood v Roberts  It is because it will be fraud on the other creditors who had all agreed to a pro rata settlement.

C: Promissory Estoppel

A further exception to the rule in Pinnel’s case can be found in the equitable doctrine of promissory estoppel which facilitates a binding promise in certain circumstances without consideration. The principle states that if the promisor makes a promise which another person acts upon, the promisor is estopped from going back on the promise even though the other person made no consideration. This is based on the dicta of Denning J in Central London Property Trust Ltd v High Trees House Ltd  and on the ruling by the House of Lords in Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd  and Hughes v Metropolitan Railway.

In the High Trees case, the Ps leased a block of flats to the Ds at an annual rent of £2500 in 1937.  The outbreak of war in 1939 prevented the Ds to bring in enough tenants and therefore Ps agreed in 1940 in writing to a reduced rent of £ 1250. After the war all flats were occupied and Ps sued for recovery of rents as per 1937 agreement. For the last two quarters of 1945.  Denning J ruled that Ps were entitled to recover as the promise of reduced rent applied to war time alone. The ratio decidendi was this. The obiter of Denning J, that Ps were not entitled to recover arrears for the period from 1940-45 by virtue of the principle Promissory Estoppel.

Conclusion

Since the ruling in Pinnel’s case, it has been established part payment of a debt in full settlement of full debt by virtue of a prior agreement is established by the reason of part payment as consideration. Some exceptions allow full satisfaction of the debt without consideration.

Bibliography

Cases

Brinkibon V Stahag Stahl [1983] 2 AC 34

Byrne & Co v Leon van Tienhoven & Co (1880) 5 CPD 344

Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1, [1893] 1 QB 256

 Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130

Chelsea Building Society v Nash [2010] EWCA Civ 1247, [2011] BPIR 381) 

Collier v P & M J Wright (Holdings) Ltd [2007] EWCA Civ 1329, [2007] NPC 136, [2008] 1 WLR 643, [2007] BPIR 1452) 

Entores V Miles Far east Corporation [1955] QB 327

Felthouse v Bindley (1862) 11 Cb (NS) 869; [1862] EWHC CP J35; 142 ER 1037

Ferguson v Davis (1996) The Independent 12 Dec 1996

Fokes v Beer HL (1884) 9 App Cas 605, Bailii, [1884] UKHL 1

Hirachand Punamchand v Temple [1911] 2 KB 330.

Hughes v Metropolitan Railway (1877) 2 App CAs 439.

Penny V Core: CCP 1602 5 Co Rep 117 a, [1558-1774] All ER Rep 612, (1602) 77 ER 237, [1572] EngR 290, (1572-1616) 5 Co Rep 117, (1572) 77 ER 237 

Re C (Debtor [1996] BPLR 535

Re Selectmotive Ltd [1993] EWCA Civ 8, [1995] STC 406, [1995] 2 All ER 531) 

[2010] EWCA Civ 1247, [2011] BPIR 381) 

Tallerman & Co Pty Ltd v Nathan’s Merchandise (1957) 98 CLR 93, 111-112

Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761

Williams v Roffey Brothers & Nicholis (Contractors) Ltd [1989] EWCA Civ 5, [1991] 1 QB 1, 10 Tr LR 12, [1990] 2 WLR 1153, (1991) 48 BLR 69, 1990] 1 All ER 512

Wood v Roberts (1818)

Books

Collins Hugh, The Law of Contract, (Cambridge University 2003)

Journals

Le Pinnel’s Case en Law of contract, Jurisprudence publié le 04/03/2011, vu 3710 fois, Auteur: LE DROIT.