UK: Payment Of Invoice Did Not Mean That A Contract Had Been Formed

Last Updated: 20 January 2012
Article by Mark Alsop

J D Cleverly Limited & Cwmbran Motors Limited –v- Family Finance Limited [2010] EWCA Civ 1477

This case involved a rogue intermediary, Gwent, who took orders for cars from customers. There were 38 separate but similar fraudulent incidents, one of which used for the purposes of the hearing.

In the particular case, Gwent ordered the car through a dealer and was paid directly by the end customer. Because Gwent was supposedly such a good customer, the dealer allowed it 30 days credit. In practice that meant that the dealer was prepared to deliver the cars to the end customer before payment was made to the dealer. Despite having been paid by the end customer, Gwent instructed the dealer to invoice Family Finance (evidence given at the trial was that this practice was not unusual in the motor trade). FF is a company which provides finance for the purchase of consumer goods by means of hire purchase agreements. At the same time, Gwent entered into a hire purchase agreement with FF ostensibly to finance the purchase of the vehicle for the purposes of a consumer hire business. The dealer was unaware of the arrangements between Gwent and FF.

An invoice was duly submitted by the dealer and paid by FF. The invoice contained terms, one of which was that a contract would only come into force once an order had been signed by one of the dealer's sales executives.

The question for the court was, essentially, who should bear the loss as between the dealer and FF. It appears to have been accepted that the end customer had obtained good title under the Sale of Goods Act. FF contended that payment of the invoices constituted a contract between it and the dealer for the sale and purchase of the car, as it could then claim for recovery of sums paid on the grounds of total failure of consideration. (It appears to have failed to claim restitution as an alternative in the particulars of claim.)

The Court of Appeal held that there was no contract. The dealer was entirely unaware of the proposed hp arrangements between Gwent and FF. The invoice made it absolutely clear that no contract was to come into effect without signature – and the mere sending of an invoice could not amount to a variation of a clear term in the invoice. The burden was on FF, as the party asserting the formation of a contract, to demonstrate that the parties manifested an intention to create a legal relationship. In circumstances where the sending of an invoice was preceded by no discussion or contact between the dealer and FF, considerations such as wording stating that the sum is "due from" FF could not displace the clear language of the document that the contract must be concluded by signature of a completed order form. The dispatch of an invoice addressed to FF was consistent with an arrangement whereby FF was, for whatever reason, to discharge the existing or future indebtedness of Gwent, without bringing into existence a contractual relationship between FF and the dealers. It was for FF by evidence to exclude other possible explanations and it fell far short of discharging the burden.

The facts of the case perhaps make is slightly special, but it is another example of recent case law where it has been crucial to establish an intention to create legal relations in order for a contract to be formed. One tends to think of contacts as requiring offer, acceptance and consideration, but this fourth limb is also important. Recent cases have considered it, often in connection with timing of the intention (i.e. precisely when a contract was formed) rather than whether there was an intention in the first place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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