In common usage a “contract” is a formal signed legal document but the legal definition of a contract is wider than that and includes agreements by word of mouth.
Contract law is based on the simple idea that if two people make an agreement where each promises to do something for the other, then they are bound by that bargain (unless they both subsequently agree to change it) and if one party does not keep to their side of the bargain, and the innocent party loses out as a result, ultimately the innocent party can take the party in breach to court and obtain an award of money (“damages”) as compensation.
An agreement will not be a contract if the circumstances show that the parties did not intend it to be legally enforceable. In a commercial context – e.g. dealings between customers and suppliers - there is a presumption that an agreement is intended to be a legally binding contract. But in a social context it depends more on the precise circumstances. For example an agreement between neighbours or friends that A will mow B’s lawn at the weekend in return for B trimming A’s hedge, would be unlikely to be a legally enforceable contract. However if A and B agree that A will mow B’s lawn each a week for a year in return for a lump sum payment of £500, the fact that a substantial sum of money is charging hands would tend to show that the agreement was intended to be a legally enforceable contract notwithstanding that it is between friends.
There are some other circumstances in which an agreement will not be a legally binding contract. For example an agreement between an adult and someone under 18 will not generally be enforceable by the adult. Also an agreement to do something which is itself illegal will not, of course, be legally enforceable. There are also a few circumstances (for example an agreement to sell land) where an agreement will not be enforceable unless it is in writing. But, those exceptional cases apart, most agreements where each side promises to do something for the other, whether in writing or not, will be enforceable contracts.
The simple idea that two people must keep to their agreement and that, if they do not, the innocent party can claim compensation, is not always so simple in practice.
Firstly, there may be a dispute about exactly what has been agreed – the “terms” of the agreement. One advantage of having a formal written agreement is that there should be less room for dispute about what has been agreed. However even if the agreement has been drafted by a lawyer, there is always the possibility of unusual circumstances arising which have not been foreseen when drafting the contact. In fact a balance has to be struck. If the contract is too detailed, whilst it may deal with some eventualities very well, the risk of an completely unintended result in unforeseen circumstances is increased, and a court, seeing the very detailed clauses may well decide that the parties must be held to what they appear to have agreed. On the other hand if the contract is simpler, whilst there will be more leeway in how a court will interpret the contact, there is less risk of a completely unintended result in unusual circumstances.
If there is no formal written contract, the court will look at what the parties said by word of mouth and in writing (e.g. letters, emails, purchase orders etc.) to try to determine what terms were agreed. Court cases often refer to the “intention of the parties” but the word “intention” is used in a technical sense. It does not refer to what the parties each actually thought, but what a reasonable hypothetical bystander would have understood the parties to have agreed, taking account of what the parties said to each other, what they did (to the other’s knowledge) in the context of all the surrounding circumstances (to the extent that those surrounding circumstances are known to both parties).
Secondly, as well as the “express” terms agreed by the parties, the law will “imply” additional terms into their agreement. Depending on the type of agreement some terms are implied by statute. If the contract is for the sale of goods, additional terms will be implied by the Sale of Goods Act 1979. If the contract is for the provision of services then additional terms will be implied by Part II of the Supply of Goods and Services Act 1982, and if goods are also supplied under the same contract – for example a construction contract where the builder is carrying out construction work which involves providing building materials (goods) and the labour (services), terms regarding the provision of the goods will be implied by Part I of SOGASA (rather than by SOGA). If the agreement is a hire-purchase or lease-purchase agreement, that is an agreement where goods are initially hired with an option to purchase at the end of the term, then neither SOGA or SOGASA applies and terms are implied, instead, by the Supply of Goods (Implied Terms) Act 1973.
The provisions of the Sale of Goods Act 1979 in particular are quite extensive and complex and imply terms not only in relation to the satisfactory quality and fitness for purpose of goods, but also such matters as the right of an unpaid seller in possession to resell goods, and the right to stoppage in transit.
In consumer contracts - broadly contracts between a business and a person not in business - the Consumer Rights Act 2015 applies which gives consumers additional rights.
Note: Sometimes the law, rather than implying a term, imposes parallel statutory duties on the supplier. For example the Equality Act 2010 may require suppliers to allow some flexibility to customers who qualify as "disabled" (the definition of disability is quite wide and covers physical and mental limitations which are long-term or recurrent - often conditions which a layman would not necessarily describe as a disability). The Consumer Credit Act 1974 provide relief against "unfair relationships" - a unfair relationship can be more than an unfair term and can take into account the whole conduct of the lender.
In addition to terms implied by statute, the courts imply terms where it is necessary to do so to give effect to an intention which the parties must have had, even though unexpressed. If the contract is a business contract then terms will also be implied where necessary to give “business efficacy” to the contract – i.e. so that it makes business sense. For example where there is a contract for a builder to erect a house on the land of the employer (customer) there will be an implied term that the customer gives the builder access to the land for that purpose.
There are a number of other bases upon which it can be argued that a term should be implied including “prior course of dealing”. If the parties have done business in the past, the terms they agreed for previous similar business may be implied into the current contract.
In general the parties retain “freedom of contract” in that they can avoid a term being implied by expressly stating in their agreement that it does not apply. However in the last 50 years statute has intervened so that some implied terms cannot be excluded, even by agreement. An example is the implied term of satisfactory quality in a contract of sale of goods. By section 6 of the Unfair Contract Terms Act 1977 the implied term of satisfactory quality can only be excluded in so far as it is “reasonable” to do so. If the case of consumers, by s.31 of the Consumer Rights Act 2015 the implied term of satisfactory quality cannot be excluded at all.
Having established the terms of the contract, express and implied, the next question in most disputes is not only whether a party is in breach of a term but how serious that breach is. The innocent party is entitled to damages (compensation) for any breach which can be proved to have caused loss but it is generally only if the breach is so serious as to be “repudiatory” that the innocent party can actually terminate the contract as well. If the initially innocent party terminates the contract in response to a breach which the court later holds in not so serious as to be “repudiatory” then the initially innocent party’s termination is itself a repudiatory breach entitling the other party in turn to damages.
The amount of damages awarded for breach of contract is generally the amount of money necessary to put the innocent party in the same financial position as if the contract had not been breached. So if, for example, satisfactory goods have not been delivered on time, the buyer can claim as damages any extra cost of buying equivalent goods at the then market price plus any expenses incurred in coping with problems caused by late delivery. Damages are in general compensatory not punitive: the court seeks to give fair compensation to the wronged party, not to penalise the contract-breaker.
Because damages can sometimes be difficult to quantify, some contracts stipulate liquidated damages, for example that £1,000 per day will be paid for each day a contractor is late in completing the project. Because of the court’s approach to damages – i.e. that they are compensatory, not punitive – the courts will not enforce liquidated damages clauses if the amount is out of all proportion to any legitimate interest of the innocent party in the performance of the contract. Until the Supreme Court decision in the case of Parking Eye v Beavis the law was that liquidated damages claims were only allowed if the amount due was a genuine pre-estimate of likely loss but the Supreme Court has now extended the principle so that in some cases a payment in excess of estimated loss can be justified. For example, in that case, it was held that a £85 charge for overstaying in a car park was justified by the fact that the charge paid for the running costs of the enforcement scheme which the retail owner of the car park needed to run in order to ensure that spaces were available for its customers and not taken up by, for example, commuters.
The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but Contact me for advice
This page was lasted updated in August 2016 Disclaimer