What is the Law of Contract?
A contract is an agreement between two or more parties that creates a legal obligation to do or not to do a particular thing. Contract law is comprised of such agreements and the legal obligations that flow from them, and it is the body of national legal jurisdiction that relates to the rights, obligations, and liabilities of the parties involved.
The purpose of the law of contract is to ensure that all involved live up to their responsibilities under the agreement. When one party does not meet its obligations, the other is entitled to seek a remedy in a court of law.
Simply put, courts aim to honour the parties’ intentions when entering into a contract. This means that it is important to fully understand exactly what is expected from you when you enter into a contract. Failure to do so will leave the court with no choice but to enforce the contract as it reads, despite the fact that the terms may not be what you imagined when the contract was signed.
The law of contract has several fundamental principles: Acceptance: You must accept an offer made by one party (the offeror) in order to create a legally binding contract. Capacity: You must have the legal capacity to enter into a contract. Mutual Consent: A contract is only valid if the offeror and the other party involved both consent to enter into the agreement. Legality: The purpose of the contract must be legal. Courts will not enforce illegal contracts. Consideration: You must be giving up prior rights to enter into the contract , otherwise you are simply giving a gift and there is no contract.
Contracts can be written, oral, and tacit. Although written contracts provide clarity and can be easier to enforce, contracts are always formed regardless of whether they are written down or recorded.
Some contracts must be written and entered into in terms of specific legislation, but in general, contracts are valid whether written or not. It is nevertheless an important part of the contract process, as such documentation will be the basis for interpreting the contract if it is necessary to go to court about the contract. This underscores the need to ensure that terms are clearly and concisely recorded and that they accurately reflect the extent of the agreement.
If work is done and services rendered, the party who did the work or rendered the service may enforce the contract despite the absence of a writing, but the court will interpret the terms of the contract based on the facts of the case.
The Courts will ask if the terms were agreed upon, if so what the terms of the contract are and whether those terms suggest a different type of contract than the one alleged by the parties.
Essential Components of a Law of Contract
A legally binding contract in England & Wales requires the following elements:
Offer – the offer must be clear and defined, and not vague or ambiguous. An offer may be made to a particular individual or group, or it may be made generally and to the public at large.
Acceptance – the acceptance must be communicated to the offeror and must be wholly unqualified. For a valid acceptance, the terms of the acceptance must exactly match the terms of the offer.
Intention to create legal relations – as a general rule, social and domestic agreements are not binding unless both parties intended the agreement to be legally enforceable.
Consideration – consideration is the price paid by the other party for the promise. This is not always money, it can be a promise in return for a promise.
In addition, in order to be valid a contract must not be:
An example of a valid contract is:
For example: I offer to sell my car to you for £3,000.
You accept my offer to buy the car on the terms that you will pay £3,000.
We have both considered this deal and intend it to be a legally binding contract.
You have fulfilled your part of the contract by paying me £3,000, and I now own a new laptop.
An Overview of the Types of Contracts
The most common type of contract is the bilateral contract. This is an agreement in which both parties make a promise to perform an act. If one or both parties fails to meet their obligation it may result in a breach of contract.
A unilateral contract on the other hand is a contract in which one party is required to contact the other even though they haven’t accepted any promises.
Express contracts are those that explicitly state the terms of the obligations for each party. On the other hand, implied contracts are those that are simply implied by the actions of both parties, in this case, performing an act.
With implied contracts, a contract is created when one party performs a service or provides goods to another party with the expectation that the other party will somehow repay them.
Common Causes of Contract Disputes
The most common issues which result in disputes over the law of contract include:
Withdrawing from a deal:
The law of contract states that a deal is only legally binding when the terms of the deal have been agreed in full by all parties. Sometimes negotiations can fall through prior to the formation of a legal agreement, for example, one party can withdraw from a deal if they feel pressured into making a deal too early and wish to withdraw as a result of this. In these cases it is rare for that party that wishes to withdraw from a deal to be held liable to the other. However, if the deal has been agreed in principle there is a risk involved when negotiating that the intended deal may be leaked or disclosed. This again, can be the basis of a contractual dispute in which a party has divulged confidential information before the deal was in place.
Insufficient Collateral
Before a deal is drawn up, the party who wishes to lend or credit a sum of money has a legal right to perform checks on the other party. This includes checks to ensure that the party applying for credit has sufficient collateral to cover itself in the amount of money which is being borrowed. If the other party does not provide sufficient collateral, then the lender has the right to withdraw from the deal. Collateral is an agreement whereby the borrower offers a bank or lender an asset as security, for example the borrower can offer a house or shares in a company as security; should the borrower fail to repay the loan, the lender can take possession of the asset in order to recoup funds. The lender must prove that in reality the borrower does not own the asset or does not have the right to act on behalf of another person with regard to providing collateral against such credit.
Payment issues
Under the law of contract, a customer must pay a supplier within an agreed time frame, if the customer fails to do this without good reason then they are in breach of contract, the supplier can sue. In the case that the supplier has not fulfilled their obligations to provide the customer with their end of a contract, the customer would be under no obligation to make payment to a supplier whose service has been inadequate.
Misrepresentation
Misrepresentation is when one party agrees to be bound by the representations made by the other parties to the contract sent via an email, some sort of written document or verbally. This representation can be either a conversation that is overheard or spoken between both parties directly, or by a third party who has been asked to enter into a contract. It can also be by mistake (innocent misrepresentation), or in some cases where a misrepresentation was intentional (negligent misstatement). The misrepresentation must be material and relate to what the other party will receive as a result of entering into the contract. To be classed as ‘material’ the misrepresentation would have had a significant impact on the decision made by the party whom relied on the misrepresentation(s) to enter into the contract.
In contrast a minor misrepresentation, a small unintended error or mistake which does not affect the validity of the outcome, can be rescinded. If the contract is overly dependent on misrepresentation, such a minor misrepresentation can result in setting aside the contract.
How to Write a Contract: Step-by-Step
To begin, the parties must be named in the contract. This section will typically list certain details about each party to the agreement. These sections often include the following:
The address of each party
The roles that each party will play under the terms of the contract
Additional parties who are part of the agreement
The date that the agreement is effective
The subject matter of the contract should also be identified and addressed in an early section. It could be a standalone clause or could be included as part of any of the clauses listed above. This is basically a description of what is being agreed upon. To avoid any confusion and make the contract crystal clear, it is important to describe the subject matter in depth.
The provisions of the contract are the clauses and conditions. These are the actual terms of the agreement. As such, these clauses will also carry specific legal terminology that may be difficult for a layman to interpret. The thoughts and intentions of the parties must be properly and legally documented in this part of the contract. The following items will likely be included in this section.
The relevant terms of the agreement
The performance of the contract
How the contract is to be enforced
The duration of the contract
Any clauses necessary to ensure proper enforcement
In this section , the boundaries of the relationship between the parties are defined. They identify the various responsibilities that each will have. The parties may also have a mutual understanding of how much liability and risk each is willing to take on. A robust representation and warranty clause is crucial, as it will help to determine enforcement and liability in the future.
Almost always found in the contract is a clause that includes details about termination. This outlines the conditions under which the contract can be terminated. The following are some points that may be addressed:
How long does the contract remain in effect
Any methods by which the agreement may be discarded
Terms that must be satisfied so that the contract may not be terminated
The manner in which the contract is to be renewed
In this clause, the parties will have provisions that deal with conflict resolution. They may outline a specific way in which disputes are to be resolved. Some may prefer to litigate, while other may have arbitration and mediation in mind. Additionally, there may be a clause for governing law. This allows a party to identify the country and state laws that will be applied when enforcing the contract.
This is the final section of the contract. It will often contain various items, including:
The entire agreement clause
Revision clauses
Amendment clauses
Other miscellaneous items
Contract Law FAQs
Sometimes people have a few issues which are not covered in the above. Some common questions I get asked include the following:
1. Does a contract for the sale of goods have to be in writing to be enforceable?
No, however if an asset is more than £1,000 it is advisable to have a formal written agreement. Depending on the wording of the contract it may also be legally binding.
2. When can I cancel a contact?
All contracts can be cancelled by mutual agreement or where the other party has breached the contract. Any terms entitling a party to cancel the contract must be in writing. For the contract to be statutorily cancellable there are certain requirements set out by the Consumer Rights Act 2015 which must be complied with.
3. How do I terminate a contract?
A contract can be terminated by mutual consent of the parties. Alternatively if one of the parties is in material breach and the other party does not waive this breach, they can terminate it at any time by serving notice of termination.
4. What is a condition precedent?
If a contract contains conditions precedent, these are conditions that must be satisfied before the parties are obliged to perform the contract. These conditions must be fulfilled objectively, as opposed to in good faith or reasonably.
5. Must I prove my loss if I want to claim damages for breach of contract?
The party in breach will try and avoid paying damages by arguing that the innocent party has failed to mitigate (or reduce) their loss, or that they are recovering for too many losses. To avoid this, the innocent party should keep proper records of their losses and their efforts to reduce losses.
How to Access Contract Law in PDF Format
All of the materials presented in the two contracts blog posts are available to law students in PDF format. I have posted an entire course titled The Law of Contract in PDF format for easy download (as well as the contracts quizzes, case summaries, and essays). This will give you 9 downloadable contract PDFs. The entire set of contracts materials is now one directory located here. This directory is also accessible from my newly updated Contracts Study Aids page.
There are a few benefits to accessing these materials in PDF (rather than on-line) . First, you can easily search or copy and paste from PDFs using Adobe’s free software. Second, you can download PDFs for later and save them in the same directory tree as your own documents.
So how do you open or access PDF files? On the bottom of each of the contracts blog posts there are links to "Original Post." Click those links and the contract law materials will open in your browser. Also, if you prefer to download the files directly instead of using the direct links, you can access all of the contracts documents in one directory that you can sort through or download.
