Business Contracts

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What Is Contract Law? (Overview)

Although not every promise is, or should lead, to a contract; generally a contract is a promise (or a set of promises) that is legally binding; (the law will compel the person making the promise) to perform that promise, or to pay damages to compensate the person to whom it was made for non-performance.

Promises are a common feature of our lives; political parties make election promises; sellers and their clienteles make promises about the supply and acquisition of goods and services; individuals make promises to family members and their friends, conversely, only some of these promises are legally binding and only some of those that are binding are contracts. Sound complicated? Let me break it down:

For a promise to be classified as a contract, it must in essence amount to an undertaking that is offered in exchange for something required in return. Here is an illustration: A promises to allow B to have a particular car, if B pays A £25,000. B pays A £25,000 and therefore A is now under an obligation to give B the car. Here we see that the main characteristic of a contract involves the concept of ‘bargain’ and is inherent in promises of this nature i.e. I promise to do something if you also promise to do something in return. One always needs to be careful when making promises because even if a promise does not contain the element of a bargain, it may still give rise to legal rights and obligations if the promisee has relied upon that promise in circumstances in which it would be unjust to allow the promisor to go unpunished for not fulfilling their part of the agreement.

A legally binding contract is a voluntary agreement reached between the parties that is enforceable in law. A valid contract requires the presence of three elements:

 

  1. An agreement; (offer and acceptance),
  2. An intention to create legal relations: this is an intention to form a legally binding relationship, and;
  3. Consideration: i.e. payment.

 

A contract is unique in that unless certain exceptions apply, parties are free to agree to whatever terms they choose, this is known as the ‘freedom of contract’.

Contract law is the body of law that pertains to the requirements and rights of the contractual parties under a contract. It governs the relationship, legitimacy, genuineness and interpretation of a contract between two or more persons (individuals, companies or organisations) regarding the sale of products, the delivery of services or interchange of interests or ownership. The law of contract is mostly self-regulatory, with the majority of contracts requiring no intervention. The contract must have a lawful purpose.

Certainty of Terms

An enforceable contract requires certainty as to its terms. It must be distinctly evident to the parties what the terms of the contract are. If an elementary term is not settled between the parties then the agreement may not amount to a contract in law. If the terms require further agreement between the parties because of uncertainty, then the contract may be deemed unenforceable.

Capacity

There must be a meeting of the minds between the parties, meaning that all the parties must have generally understood what was being agreed. Both parties must have the capacity to comprehend the terms of the contract they are entering into, and the consequences of the promises they make. For example, minors or mentally challenged individuals do not have the capacity to form a contract, and any contracts with them will be considered void or voidable.

The Basic Principles Of English Contract Law (Breakdown)

A contract is an agreement giving rise to obligations which are enforced or recognised by law. As briefly mentioned above, in common law, there are 3 basic essentials to the creation of a contract; offer and acceptance create an agreement; consideration and contractual intention. If we consider the first requisite of a contract we will see that the parties should have first reached an agreement. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. Let us break down even more each of the elements that form a contract starting with:

Offer

An offer is a manifestation or communication of readiness to contract on stipulated terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed.  There must be an objective appearance or exhibition of intent by the offeror to be bound by the offer if accepted by the other party. Therefore, the offeror will be bound if his words or conduct are such as to persuade a reasonable third party observer to believe that he intends to be bound, even if in fact he has no such intention. An offer can be addressed to a single person, to a particular group of persons, or to the whole world. An offer may be made expressly (by words) or by conduct.

An offer must be differentiated from an invitation to treat, by which a person does not make an offer but invites another party to do so. So how can you tell if a statement is an offer or an invitation to treat? This will depend predominantly on the intention with which it is made. An invitation to treat is not made with the intention that it is to be binding as soon as the person to whom it is addressed communicates his consent to its terms. Invitations to treat include advertisements or displays of goods on a shelf in a self-service store and are usually not a contract. Partridge v Crittenden [1968] 1 WLR 1204, Pharmaceutical Society of Great Britain v Boots Cash Chemist (Southern) Ltd [1953] 1 QB 410.

However, the super famous case of Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1 is different and therefore relevant here. This English contract law decision by the Court of Appeal, which held an advertisement containing certain terms to get a reward constituted a binding unilateral offer that could be accepted by anyone who performed its terms. It is notable for its curious subject matter and how the influential judges, (particularly Lindley LJ and Bowen LJ), developed the law in inventive ways.

The details are as follows: A medical firm advertised that its medical preparation or new drug, called “The Carbolic Smoke Ball” would cure flu, and if it did not, buyers would receive £100. This meant that any person who contracted the influenza after having used one of their smoke balls in a specified manner and for a specified period would receive £100 from the medical firm. Mrs Carlil on the faith of the advertisement bought one of the balls, and used it in the manner and for the period specified, but nevertheless contracted the influenza. Mrs Carlil approached the medical firm for her £100 but the company refused leaving Mrs Carlil no choice but to sue. When sued, Carbolic argued the advert was not to be taken as a legally binding offer as there was no contract because it lacked the typical offer and acceptance; it was merely an invitation to treat, a mere puff or gimmick. However, the Court of Appeal held that the advertisement was an offer of a unilateral contract between the Carbolic Smoke Ball Company and anyone who satisfies the conditions set out in the advertisement. Once Mrs Carlill had satisfied the conditions she was entitled to enforcement of the contract; the notification of implementation of the conditions formed part of the acceptance. An intention to be bound could be inferred from the statement that the advertisers had deposited £1,000 in their bank “showing our sincerity”.

Acceptance

An acceptance is a conclusive and definite expression of agreement to the terms of an offer. Once again, there must be an objective appearance or exhibition of an intention by the recipient of the offer to be bound by its terms. An offer must be accepted in accordance with its specific terms if it is to form an agreement. It must accurately and faithfully match the offer and ALL terms must be accepted. The legal effect of acceptance only comes in to existence when it is communicated to the offeror. Communication of acceptance is an important element and without communication to the offeror, the offeror will be bound without knowing that his offer had been accepted and this could cause all manner of hardship.

Can an offer be accepted by conduct or are just words acceptable? An offer may be accepted by conduct for example, an offer to buy goods can be accepted by sending the goods to the offeror.

Are there other ways that an offer can be accepted? Yes. With regards to postal acceptance, the general rule is that acceptance takes effect when the letter of acceptance is posted and this includes situations when the letter becomes delayed, lost and even destroyed. However, there is one instance that the postal rule will not apply and that is if it is excluded by the express terms of the offer, Adams v Lindsell [1818] 1 B & Ald 681 and Henthorn v Fraser [1892] 2 Ch 27.

With regards to acceptance via an instantaneous medium such as email, it will take effect at the time and place of receipt, Entores v Miles Far East Corp [1955] 2 QB 327.

What is the situation where acceptance needs to be communicated in a specified way? This means if communication of acceptance is communicated in another way, it will not be accepted; it can generally be accepted only in that specified way.

If a communication attempts to vary the terms of an offer, it will fail to take effect as an acceptance. The situation posed here is rather a counter-offer. Hyde v Wrency [1840] 3 Beav 334. The original offeror has a choice whether to accept or reject the offer. It is not compulsory to accept a counter offer. A good example is when the offeror offers to trade on its standard terms and the offeree purports to accept, but on its own standard terms, this represents a counter-offer. Here we see that making a counteroffer amounts to a rejection of the original offer which cannot consequently be restored or accepted unless the parties agree.

Counter-offers are not the same as a request for further information. It is important to distinguish the two because a mere request for further information is regarding the original offer and not a new or counter-offer.  

An offer may be withdrawn at any time before its acceptance; however the withdrawal must be communicated to the offeree; if it is not communicated, the revocation is ineffective. A withdrawal need not be communicated by the offeror personally because it can be made by a reliable third party.

Lastly, an offeror cannot stipulate that the offeree’s silence amounts to acceptance. Acceptance must be communicated in one of the forms above.

Once an offer has been accepted, the parties have an agreement. That is the basis for a contract, but is not sufficient in itself to create legal obligations.

Consideration

In common law, in order for a promise to be binding, there needs to be consideration unless it is made as a deed.

What is consideration? Consideration is “something of value” which is provided for a promise and is obligatory in order to make the promise enforceable as a contract. If only one party offers consideration in contract, the agreement is not legally a binding contract. For example, payment by a buyer is consideration for the seller’s promise to deliver goods, and delivery of goods is consideration for the buyer’s promise to pay.

Consideration must be sufficient, but need not be adequate. What does this statement mean? This means that consideration must have some value, but this value does not need to match the return of the agreement. For example, A wants to buy B’s brand new bag. The bag is worth £100 but A will only pay £40 for it. The consideration is £40 which has some value but this value does not match the price of the bag. Usually, a promise has no contractual force unless some value has been given for it.

Law courts do not usually get involved with whether there is any economic equivalence between the value of the consideration given and the value of any goods or services received. You may ask why? This is because they do not normally interfere with the bargain made between the parties. Consequently, nominal consideration is sufficient; however consideration must not be from the past. The consideration for a particular promise must be given in return for that promise. The promisee must provide the consideration.

Now that we know what consideration is, what does not constitute consideration? Consideration is not an informal gratuitous promise because this does not amount to a contract.

Consideration is vital with regards to enforcing a contract. Customarily, a person to whom a promise was made can enforce it only if the person themselves provided the consideration for it. In fact, a person does not have a leg to stand on if the consideration moved from a third party. Let us look at an example: if A promises B to pay £10,000 to B if C will paint A’s house and C does so, B cannot enforce A’s promise, (unless B had procured or undertaken to procure C to do the work).

However, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met, a third party may be able to compel rights created in his favour by a contract which he was not a party to, and the courts are also adopting a more adaptable position under the common law here, which is progressive. While consideration must move from the promisee, it need not move to the promisor.

Consideration may be satisfied where the promisee suffers some detriment at the promisor’s request but confers no corresponding benefit on the promisor.

Exceptions to the rule – an example of such is where certain terms of a contract are void either by statute or where common law holds the terms to be so unreasonable that they cannot be enforced and/or are varied by the courts. If consideration is given by the promise in this circumstance, the contract will still not be enforced.

Another exception is where consideration may move from the promisee without moving to the promisor where the promisee, at the promisor’s request, confers a benefit on a third party. In situations where goods are bought with a credit card, the issuer makes a promise to the supplier that s/he will be paid. The supplier provides consideration for this by providing goods to the customer.

Legal Intentions

There has been an offer and this offer has been accepted, there has further been consideration but one thing is left; the intention to create legal intentions. If this is not present then any agreement made is not binding as a contract. There must be an intention by the parties that the agreement is legally binding.

Social arrangements which include an agreement and consideration do not amount to contracts because they are not intended to be legally binding. Equally, household arrangements, such as marital, or between parent and child, lack force because the parties did not intend them to have legal consequences.

In Balfour v Balfour [1919] 2 KB 571, is a leading English contract law case. In this case, Mr Balfour was a civil engineer, and worked for the Government as the Director of Irrigation in Ceylon (now Sri Lanka) with Mrs Balfour. In 1915, they both came back to England during Mr Balfour’s leave. The plan was for the both of them to go back to Sri Lanka but Mrs Balfour was unwell. On leaving Mr Balfour promised Mrs Balfour £30 a month until she came back to Sri Lanka. Sadly, they drifted apart and Mr Balfour wrote saying it was better that they remain apart. In March 1918, Mrs Balfour sued him to keep up with the monthly £30 payments. In July she got a decree nisi and in December she obtained an order for alimony. Interestingly, at first instance, judge Charles Sargant held that Mr Balfour was under an obligation to support his wife but it was at the Court of Appeal level that the judges unanimously held that there was no enforceable agreement because the parties did not intend the arrangement to be legally binding.

In the case of ordinary commercial transactions, there is a presumption that the parties intended to create legal relations. The burden of refuting this presumption is on the party who asserts that no legal effect was intended, and the burden is a hefty one.

Lastly, an agreement which is made “subject to contract”, (usually, agreements for the sale of land), or a “letter of comfort” are generally unenforceable. If you read the words of the agreement closely, you will note that the words normally invalidate any contractual intention, so that the parties are not bound until formal contracts are exchanged which there is no guarantee of.

The Importance Of Contract Law

Without contracts, life in the corporate and commercial world (regarding transactions, executing business deals and trading), could not exist. Is that statement too dramatic? Not really because in many countries most goods and services are manufactured and supplied through markets and markets have at their core, contracts. Contracts are the mechanism used which enable industries to flow smoothly and are the backbone of trade across multiple sectors.

Here’s a simple instance; In order for business X to purchase stock, lease premises, sell its products or services, and use banking and technology systems to make or receive payments, practically every transaction it will make will encompass contracts. In fact, it is a rare occurrence, (or not an occurrence at all), for a contract not to be involved in all these types of transactions.

Now, it is understandable that the law can appear unexciting and perplexing, but would you use this as a reason not to protect yourself or your business? Legally, you have the freedom of choice as to whether to have contracts, but in actual fact, it would be absolutely crazy not to – you should never do business without them.  Your business and the deals that are executed should have a solid legal framework in place. Contract law serves as your fortification in every legal agreement you make and there are a plethora of additional reasons as to why contracts are essential:

Creates Certainty and Provides In-depth Coverage of Your Business – With a contract in place, it conveys to all parties, how to act and what is expected from them. Contracts can cover many matters but overall it outlines the functioning and transaction procedures of a business and explains how the customer or client can use the services.

Solidifies Remuneration – Within most contracts, parties expect to be paid so contracts communicate to the parties the time they can expect an invoice and when they need to pay.

If there is a situation whereby one party refuses to pay the other, a legally enforceable contract will buttress a legal action because the law holds the party accountable for the breach. When a party fails to fulfil his part of obligations, breaches could include:

  1. failure to perform a contractual duty on time;
  2. failure to perform as per terms of a contract;
  3. failure of performance.

 

The relief offered upon failure to perform the terms of the contract may be to recover the debt and depending on the circumstances, you could be entitled to more.

There are some uncommon cases in which the courts are willing to order the breaching party to perform services as described in the contract; known as specific performance. This is only implemented in those instances when the subject matter of the agreement is exceptional or a one-off. One of the main reasons for this is that damages for the same would not be adequate to place the non-breaching party in the same position as he was preceding the other party’s compliance of the terms of the contract.

Limitation of Liability – Individuals who choose to use a legal framework to assist in managing their business will automatically be limiting their liability simultaneously. Limiting ones liability also facilitates in resolving disputes, aids in you obtaining payment and protects valuable business assets.

There are some instances when the non-breaching party is allowed to terminate the entire contract and this voids the contract and alleviates the parties from any obligation. If the non-breaching party has already provided some benefit to the other party, he or she can also claim restitution.

Minimisation of Disputes or Problems – A contract can help to protect you in many different ways and one of them is minimising the extent of disputes or problems. If a dispute arises, a contract allows you the opportunity to mediate as a resolution to the problem first. If mediation fails, then the contract can be relied upon as a legally enforceable document supporting a legal action or debt recovery.

Enforceability – Contract law makes these agreements “enforceable” and contracts protect parties by assuring that the promises will be kept. The contract itself creates an obligation or duties to do and rules to follow by both parties and provides remedies in the event that performance fails.

Builds Trust & Provide Peace of Mind – A contract gives you and the client peace of mind because you know any transactions and work are protected. By putting a legal framework in place you are showing that as well as caring for your business, you also care about your clients; which builds trust.

Protection of Your Intellectual Property – Protecting your business and its assets is extremely important and this includes intellectual property (IP). Some people may believe that IP automatically goes from one party to the other through a service of goods transaction. This is incorrect. IP needs to be assigned through a contract in order to have full ownership and communicate how the intellectual property is to be used. It is a valuable part of your business and you need to ensure that it cannot be stolen or misused.

Manage Expectations – A contract will communicate all the necessary information the party needs to do business with you, so they understand what to expect. When you convey the terms and conditions of sale to a client you for example, you are managing their expectations.

Assist to Navigate the Law – It is tremendously common for businesses to fall foul of the law because they may not understand it, so a contract drafted by an expert will ensure that you stay on the right side of the law. A contract will allow you to navigate it correctly. Obviously there are contract templates available online, but unfortunately these will not reflect your business or furnish you with the full protection necessary to operate at optimal level in the commercial world.

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