1) When is a contract formed?
A contract is formed when the following five basic elements coincide:
- Offer
- Acceptance
- Consideration
- 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.
2) 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.
3) 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.
4) 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.
5) 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
- Statute
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) What remedies are available for breach of contract?
a) Damages
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.
c) Injunction
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
d) Rescission
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:
- Misrepresentation
- Mistake
- Duress
- Undue influence
e) Rectification
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.
For more information, please email diy@adjudicationservice.com or call us at 0203 468 5771.
