When is a contract formed?
A contract is formed when the following five basic elements coincide:
- Intention to create legal relations
- Certainty of terms
A contract may be made in writing, by word of mouth, partly in writing and partly by word of mouth, or may be implied from the conduct of the parties. Parties involved in any negotiation process should therefore always have the five basic elements in the back of their minds, and be careful not to bind themselves inadvertently to a contract during the preliminary stages of negotiations.
What constitutes ‘offer’ and ‘acceptance’?
Traditionally, the law considers that an agreement is formed when one party communicates an offer to another party, who then communicates acceptance of that offer. However, the court is sometimes prepared to overlook the match and be more flexible in its approach by finding that an agreement exists through reason of public policy, fairness, intention of the parties or a course of dealing.
Does an oral agreement constitute a binding contract?
Although oral contracts are legally enforceable, it is prudent to have a written contract to record the terms which can then be used for evidential purposes if necessary. However, the court is sometimes prepared to consider the parties' conduct subsequent to the formation of an oral contract as evidence of the contract terms.
It is important to note that there are a number of situations where a written contract is required by law or in order to fulfil certain registration requirements.
Does a written contract need to be signed to be effective?
As a general rule, when a contract has been reduced to writing and the evidence shows that the parties intend to execute a formal agreement, the courts will normally infer that the parties do not intend to be bound by that document unless and until both of them sign it. However, the courts may be more flexible in their approach where evidence is adduced which clearly shows that the parties had a different intention.
What are ‘express’ and ‘implied’ terms?
The express terms of a contract are those terms that have been expressly stated by the parties, either in writing or orally.
Implied terms are terms that have not been expressly agreed by the parties but are implied into the contract by the court on the basis of:
- Usage or custom
- The parties' previous course of dealings
- The intention of the parties, a term implied "in fact"
- Common law
What is the difference between a ‘condition’ and a ‘warranty’?
Many terms implied by statute are classified as conditions or warranties by the relevant statute. For instance, the terms implied by the Sale of Goods Act 1979 concerning the seller's title to the goods, their compliance with their description, their quality and fitness for purpose are stated to be conditions, while the terms implied relating to the buyer's quiet enjoyment of possession and the goods' freedom from undisclosed encumbrances are stated to be warranties.
If the parties expressly identify a term as a condition or warranty, the courts will generally treat it as such.
The distinction is important because of the effect it has on the remedies available to the aggrieved party for breach of contract. As a general rule, the breach of a condition allows the aggrieved party to terminate the contract and claim any losses through damages. A breach of warranty however, will usually only entitle the aggrieved party to a claim for damages.
What is an ‘entire agreement’ clause?
The entire agreement clause (or whole agreement clause) is one of the most important boilerplate clauses. It has received extensive analysis by the courts and is one of the most regularly litigated clauses in commercial agreements.
The main purpose of an entire agreement clause in a contract is to limit the parties’ rights and obligations to the provisions contained in the relevant agreement. They operate to exclude liability for any pre-contractual statements which either party may have made to the other prior to entering the contract.
Parties often try to rely on entire agreement statements to defend themselves against liability for misrepresentation by arguing that an entire agreement statement shows the parties intend the contract to be an exhaustive statement of their rights and liabilities towards each other in relation to the contract's subject matter. However, the courts have consistently rejected this argument, and an entire agreement clause is therefore generally not a good vehicle for attempting to limit liability for misrepresentation.
What is a ‘retention of title’ clause?
The object of a retention of title clause is to give the seller of goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods because it is insolvent, or for some other reason which may be specified in the clause. The clause may be used in its basic form (supplemented by certain other standard clauses) or with one or more additional clauses (such as an all monies clause, proceeds of sale clause or mixed goods clause). The basic clause provides that title to the goods is retained by the seller until it has received full payment for the goods.
Factors that need to be considered alongside a retention of title clause include whether risk should pass upon payment or delivery of the goods, and whether (where the latter provision applied) the seller should include a provision requiring the buyer upon delivery to insure the goods with a reputable insurance company. Failure to properly define a retention of title clause can often be the cause of commercial contract disputes.
To what extent can liability be excluded?
All businesses are exposed to an element of risk in their day-to-day activities. Commercial contracts therefore invariably seek to exclude or limit liability for certain categories of damages.
The Unfair Contract Terms Act 1977 (UCTA) is the principal statute that deals with exclusion clauses.
Clauses that are prohibited include:
- Those that seek to exclude liability for death or personal injury caused by negligence.
- Those that seek to exclude liability in relation to good title and quiet possession.
- Those that seek to exclude liability in relation to satisfactory quality, fitness for purpose, conformance with description or sample (in respect of consumer sales).
Other clauses are subject to the test of ‘reasonableness’ under UCTA. Factors that will be taken into account when considering the issue of reasonableness in contracts for the sale or supply of goods include:
- The strength and bargaining position of the parties.
- Any inducement given to agree to the terms.
- The extent to which the customer knew or ought to have known of the existence and extent of the term.
In practice, where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they will be taken to have had regard to the matters known to them. Unless satisfied that one party has in fact taken advantage of the other, or that a term is so unreasonable that it cannot properly have been understood or considered, the court should not interfere.
What is the time limit for bringing a contractual claim?
The law on limitation periods is set out in the Limitation Act 1980 and provides a period of six years in respect of breach of contract. There is no need for damages to have been caused before a claimant is able to sue in contract. The cause of action accrues on the date of the breach of contract and the six year limitation period runs from this date.
The Limitation Act itself is silent as to whether parties may contract out, either by agreeing a different period (longer or shorter) than that prescribed under the Limitation Act, or by agreeing that there should be no limitation period applicable between them at all.
However, it seems that subject to such a term not falling foul of the requirements in the Unfair Contact Terms Act 1977 (UCTA), limitation periods may be reduced or extended by agreement for claims in tort or contract.
What remedies are available for breach of contract?
A breach of contract occurs when a party to a contract fails to perform some or all of its obligations in the contract. It entitles the other party to claim damages for any loss it suffers. An award of damages is the basic remedy available for a breach of contract. The object of damages is usually to put the injured party into the same financial position he would have been in had the contract been properly performed. However, not all damages are recoverable, particularly where they are considered too remote to have been foreseeable. When a breach of contract is sufficiently serious the other party is entitled to treat itself as being discharged from further obligations under the contract, instead of or as well as, claiming damages.
Sometimes damages are not an adequate remedy and this is where equitable remedies may be awarded.
b) Specific performance
An order for specific performance will be made by the court and require a party to perform a positive contract obligation (i.e. to do something that they should have done under the contract). In general the court will only grant specific performance where it would be just and equitable to do so.
It is also possible to obtain an injunction in respect of breach of contract, whereby the court orders a party to perform a negative obligation. Injunctions fall into two broad categories:
- Prohibitory injunction, which is an order that something must not be done
- Mandatory injunction, which is an order that something must be done
Rescission is the setting aside of a contract. The parties are put back into the position in which they were before the contract was made. It may be available where a contract has been concluded as a result of:
- Undue influence
Rectification only applies in the case of written contracts. Its main purpose is to correct mistakes made in recording agreements. The courts can rectify a written agreement that does not reflect the true bargain between the parties. There is no limit to the amount of rearrangement or correction that the court may allow.
What can I do if someone’s not paying me for work I’ve done/products I’ve supplied?
It may sound obvious, but in the first instance you should try to find out the reason why you have not been paid. It might be due to an administrative error or for some other reason which is easily remedied. You do not necessarily want to act in haste in seeking to terminate or jeopardise a business relationship which is otherwise working well.
If more formal action is needed, you might consider sending a notice to remedy breach of contract. Such a notice should set out clearly the relevant terms of the agreement between you and the non-paying party, the details of the breach(es) in question, the actual and potential loss that you have suffered as a result, and the action that you require the non-paying party to take (and the timeframe within which they are required to take it).
In some circumstances, you might want to consider terminating the contract and seeking damages from the non-paying party as a result of their breach(es). Late payment under a contract does not necessarily lead to a right to terminate, however non-payment may be one sign that the other party has abandoned the contract or has refused any further performance. A party’s entitlement to terminate a contract based on non-payment therefore depends on the specific circumstances of that case, and therefore it is important to seek legal advice before abandoning a contract and asserting a claim for damages.
It is important to remember that even as an innocent seller in circumstances where a buyer defaults in paying for goods ordered, you are still under duty to take reasonable steps to minimise your loss. In other words, you cannot necessarily sit back and sue for the full value of the contract. Instead, you will generally be expected to attempt to sell the goods to an alternative buyer for a reasonable price. What is reasonable is generally a question of fact, but it is not safe to assume that doing nothing will be considered reasonable or that it is reasonable to take action to remedy a breach without due regard to all available options.
Can I delay payment under a contract?
This depends to large extent on the reason why you want or need to delay payment. If it is a question of cash flow difficulties, then you might want to reach out to the other party to see whether they will agree to delayed payment or payments in instalments, particularly if you wish to maintain a good commercial relationship.
However, if you are concerned that the other party might not be so accommodating, rest assured that late payment under a contract is not usually enough to entitle the other party to terminate the contract.
Most contracts will provide for what happens in circumstances where a party delays in making payment. Usually it will trigger an entitlement to interest. Even if the contract does not contain such a provision, The Late Payment of Commercial Debts (Interest) Act 1998 gives small businesses the statutory right to claim interest on late payments from other businesses.
Can I get out of a contract which is now impossible to perform?
- Occurs after the contract has been formed.
- Is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract.
- Is not due to the fault of either party.
- Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.
What happens when there is a mistake in creating the contract?
Many mistakes have no impact on a contract's formation or terms. The parties are held to the bargain they have made, despite their misunderstandings as to the contract wording, its legal effect, their underlying rights, or the commercial benefits of entering the agreement. It is each party's responsibility to satisfy itself on all these points before agreeing to a contract. In the absence of special circumstances their only recourse, if they get it wrong, is to hope the counterparty will agree to amend or renegotiate the contract.
In some cases, the Courts will correct a mistake in a contract to bring its express terms in line with what the Courts understand to have been the parties' intentions. They may do so by interpretation or, in limited cases, rectification.
In extreme cases, a mistake may prevent formation of a valid contract. The mistake may negate agreement or render the contract too uncertain to enforce. In most cases, more than one analysis is possible. A party will normally pursue as many arguments as it can and take its pick of any rights it may succeed in establishing.
A party wishing to set aside a voidable contract must do so promptly and clearly. The right may be lost by delay, or by continuing to perform and demand performance.
I am concerned that someone has committed a fraud or misrepresentation in creating a contract to which I am a party. What can I do?
Where a person has entered into a contract on the basis of a false statement and, as a result suffered loss, they may be entitled to bring a claim for compensation or for the contract to be cancelled. Although, that may appear logical and straightforward there are a number of elements to that statement which must all be met in order for the person to be entitled to the remedy they seek.
First, the statement must have been untrue. It must have been made to a person entering into the contract and must have been relied upon by that person. If a person has heard the untrue statement, disregarded it and entered into the contract anyway then they cannot be said to have relied on the misrepresentation. There must be a link between the statement and the decision to enter into the contract.
Whether the person has been the victim of fraud or misrepresentation will depend on what the person making the statement knew of the truth of the statement at the time it was made. This is where the difficulty in bringing a successful claim often lies.
Broadly speaking, if the person knew that the statement was untrue or if they did not believe it was true, a fraudulent misrepresentation may have occurred. On the other hand, if the statement was made carelessly or in circumstances where it was not reasonable for the person making it to believe it was true, there may have been a negligent misstatement.
If the above elements are present and the person relying on the statement has suffered loss they will be entitled to make a claim for damages or for the rescission of the contract (i.e. for it to be cancelled). If damages are awarded the court will seek to place the claimant in the position they would have been had they not relied upon the statement.
What happens when a contract has an illegal purpose or violates public policy?
A contract for an illegal purpose will not automatically be void or unenforceable. However, it will be open to one of the parties to the contract (or the Court) to raise the fact that the contract is for an illegal purpose as a defence to any claim.
The Courts will take a case by case approach and should not seek to punish the parties because of their illegal activities – that would be a matter for the criminal courts. Adopting that approach means we cannot be certain how a Court will treat a particular contract, however the Court will always have the same considerations in mind.
The Court’s primary consideration will be how best to serve the public interest. It will focus on three factors: (a) the reason the activity is illegal or against public policy and how to deal with the contract to best serve that reason; (b) any public policy which may be impacted by its decision; and (c) whether dealing with the contract in a particular way is a proportionate response to the illegality.
I am worried about an agreement I entered into over email. I did not sign a contract. Where does that leave me?
While most contracts will be formalised in a single document and signed, there is no requirement for an agreement to be in that form for it to be a contract.
Provided an offer has been accepted, some form of payment (which can be in goods or services) has been agreed, the terms of the agreement are clear and unambiguous and the parties intend to be legally bound by them, a contract will have been formed. The content of an exchange of emails can, therefore, be sufficient for a contract to be formed and for the terms agreed to be enforceable.
However, when emails are exchanged the language used is often informal and, therefore, potentially ambiguous. The parties may also have forgotten or not addressed key terms, if they have not come up in the course of correspondence.
You will be in a more certain position if the terms of the agreement have been distilled into one document. The document does not have to have been signed to be enforceable, particularly if the parties have followed the terms of the document in the conduct of their professional relationship. However, a signed document is always preferable as it will be easier to prove that the parties intended to be bound by the terms in the contract, and what those terms are.
A small point in relation to cancellation: contracts that have been entered into remotely (for example by email) attract a longer cancellation period. Under consumer rights law, customers have 14 days in which to change their mind about a contract they have entered into remotely. After that time they will become bound by the terms of the contract including those relating to its cancellation.
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