 ContractsIn 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. Enforceable contractsAn 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. Disputes about the contract termsFirstly, 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). Terms implied by statuteSecondly, 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. Terms which it is necessary to implyIn 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. Terms implied by a course of dealingThere 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. Freedom of contract and its limitationsIn 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, if the sale is to a
“consumer”, the implied term of satisfactory quality cannot
be excluded; if the sale is not to a consumer the implied term of
satisfactory quality can only be excluded in so far as it is
“reasonable” to do so. A “consumer” is generally a person not in business who buys from someone who is in business, but the precise meaning varies from one statute to another. For example it has been held by the courts that under the Unfair Contract Terms Act 1977 a business buying goods which it does not deal in (e.g. a business not in the motor trade buying a van to make deliveries) counts as a “consumer”. Breach of ContractHaving 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.How damages are calculatedThe 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.Liquidated DamagesBecause 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 only
allow liquidated damages claims if the liquidated damages specified
were, at the time the contract was entered into, a genuine pre-estimate
of likely loss. If the court finds that the amount of liquidated
damages agreed exceeds any likely loss (as it was perceived to be by
the parties at the time of contracting) the court will disallow the
claim on the grounds that the clause is a “penalty” and not
liquidated damages. The way in which the payment is classified (both in
terminology in the contract and in substance) can be crucial, however.
For example the court held in one case that charges by banks for
unauthorised overdrafts (which charges greatly exceeded the likely cost
of dealing with the unauthorised overdraft) were not penalties for
breach but merely agreed charges for the “service” of an
unauthorised overdraft, and were therefore allowed. This page was lasted updated in October 2010. Disclaimer |