What is a Contract?
- When is a Contract Legally Binding?
- Void/Voidable
- Oral/Verbal Contracts
- The Terms of a Contract
- Express and Implied Terms
- Classification of Terms
- Condition, Warranty or Intermediate Term?
What is a Contract?
Essentially, a contract is an agreement between two or more parties intended to legally bind them to an agreed set of terms which can be enforced against the other parties.
There is no legal definition of what constitutes a contract. Although we often think of a contract as a wordy document, perfectly typed up in infinitely small text across 4,000 pages and requiring signatures in triplicate on each page only to be sealed in blood (and by this point tears) on the last, this is not necessarily what a contract has to be.
A contract is simply an agreement that is legally binding.
When is a contract Legally Binding?
There are many misconceptions about contracts and what form they have to take to become legally binding, such as that they have to be written down to be enforceable, written by a solicitor, or that they always have to be signed as a deed.
The reality is more about the agreement reached between the parties and their mutual understanding of that agreement, rather than the form that the agreement takes. When the following elements occur together, a legally binding contract is formed:
- Offer
- An offer must be specific, complete, capable of acceptance and made with the intention of being bound once accepted.
- A party can make an offer to a specific individual or company, a group of people or companies, or the entire world (often through an advertisement as in the well-known case of Carhill v Carbolic Smoke Ball Co).
- An offer is different from an ‘invitation to treat’ (basically an invitation to negotiate an agreement) in that it is complete and will, on acceptance, create a legally binding agreement which accepting an invitation to treat will not. For example, displaying goods for sale on the shelves of a shop is an invitation to treat, not an offer. Only when a customer takes the goods to the till to is an offer made (by the customer) and accepted once payment is taken. On first reading, this can be an odd distinction, but to construe this the other way around would mean that you accepted an offer (which you were bound by) every time you picked up an item off the shelf in the supermarket! For more information on this point see the case of Pharmaceutical Society of Great Britain v Boots Cash Chemists.
- Acceptance
- Acceptance occurs when a party accepts an offer made by another party.
- Generally, the acceptance must be communicated to the offeror in order to be accepted. However, there are certain situations when conduct can be sufficient to amount to acceptance of an offer.
- Consideration
- Consideration is the legal term for the good(s), sum of money or promise to do (or not to do) something which each party is giving to the other. Each party gives consideration to the other in exchange for the consideration they are receiving. For example, if you purchase a book from a shop, you are receiving the book in consideration for a sum of money.
- The consideration does not need to be adequate to make the contract legally binding; it is up to the parties what they want in consideration for what they are providing.
- Past consideration is generally not good consideration.
- A contract can still be enforceable if it lacks consideration, but only if it has been executed as a deed.
- Intention to be legally bound/to create legal relations
- Both parties, when an offer is made and when it is accepted, must intend to be legally bound by the agreement they are making. This intention is generally presumed to have existed where there is a commercial background to the agreement.
Void/Voidable
In addition to the above, there are also more practical considerations which, although they may not prevent a legally binding contract for forming, will affect the enforceability of the contract and may make it void or voidable.
A void contract was never effective from the moment it was made, and it was therefore never legally binding. However, the parties to a contract may carry out their contractual obligations regardless, unaware that the contract is void. It is only when a dispute arises that the court may then find and declare the contract to have been void.
A voidable contract is valid, however the ‘injured’ party may rescind (cancel/set aside) the contract by giving notice to the other party or by seeking an order from the court. If the injured party continues with the contract and does not exercise their right to rescind, they may have affirmed the contract. The effect of rescission is to ‘undo’ the contract and to retrospectively put the parties back into a position as though it has never existed.
The factors affecting the enforceability of a contract include:
- Capacity – the parties to a contract must have legal capacity to make a contract (for example individuals must be at least 18 years of age). If one party to a contract lacks capacity, the terms of the contract will be unenforceable against them and the contract will be voidable and may be found to be void.
- Certainty of terms – if the terms of an agreement are incomplete or uncertain, the contract may be unenforceable as a result. Also, the contract may be void if it lacks the certainty to form a legally binding agreement.
- Lack of authority – if the person making the contract does so on behalf of a company but does not have the authority to bind the company to a contract, then the contract is likely to be unenforceable and possibly void.
Oral/Verbal Contracts
A verbal contract is legally binding (provided it meets the above criteria). The form of the contract is usually irrelevant as to whether a legally binding contract is formed. There are a few exceptions to this, where statute requires a contract to be in a particular form; for example, a contract for the sale of land must be made in writing under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Similarly, a transfer of land must also be executed as a deed under section 52 of the Law of Property Act 1925.
Aside from these specific exceptions, a contract written by hand on a napkin, or an oral contract can be just as valid as a written contract drafted by a solicitor.
The problem with verbal contracts is that, when it comes to enforcing them, it can often be difficult (for obvious reasons) to prove what the terms of the contract were, or even that the contract existed.
A written contract solves this problem but creates its own issues which arise from how effectively the contract has been drafted. A written document obviously provides evidence that the contract exists, but it can easily miss out important terms of the agreement, or these terms can be written in such a way as to be interpreted different ways.
For this reason, people often have solicitors draft contracts, so that they can be sure that the written contract will be complete and leave them in a position to easily enforce the contract against the other party in the event of breach.
The Terms of a Contract
Once a contract has been formed, the terms of that contract are binding, and each party is entitled to performance of the contractual terms by the other. Failure by one party to perform a term of a contract will likely result in that party having breached the contract.
It is therefore important to consider what the terms of a contract are or are likely to be. A contract is not only made up of the terms agreed between the parties and drafted into the contract (Express terms) but will also be deemed to include other terms which have not been drafted into the contract (Implied terms).
Express and Implied Terms
Express terms are the terms which have been expressly agreed by the parties to a contract. In a written contract, they are usually the terms that have been drafted into the contract document.
Implied terms are terms which, although not expressly agreed by the parties and drafted into the contract, are implied into the contract by the court.
These terms can be implied into a contract in the following ways:
- Usage or Custom – the court may deem that a contract incorporates any terms that are customary to a particular trade. This can include customs/usage which one, or both, of the parties are unaware of.
- Previous course of dealings – where the parties to a contract have previously had regular dealings or have been engaged in regular trading, and have done so on previous terms, the court may imply into the contract a term that relates to the previous course of dealings.
- Implied in fact – where a contract is silent on a particular issue or term, the court can imply a term into the contract to fill this gap if the court finds that the parties must have intended the provision to have been incorporated.
- Common law – the court will imply terms into a contract based on the type of contract, and the decisions in previous cases involving that type of contract (common law basically means the precedents set in case law).
- Statute – various statutes imply terms into contracts, depending on the type of contract. For example, the Consumer Rights Act 2015 implies several terms into contracts between consumers and traders which are aimed at providing statutory protection to consumers. Another example is the Working Time Regulations 1998 which imply terms into employment contracts.
Classification of Terms
We have seen that contracts are made of up express and implied terms. These terms are categorised in relation to their significance to the agreement by dividing them into Conditions, Warranties and Intermediate (or Innominate) terms.
When breach of contract occurs, the remedy that can be sought depends upon what type of term has been breached. Equally, however, it is often not apparent what classification a term falls into until it has been breached. This is because the classifications are, in part, defined by the effect they have on the agreement and the ‘injured’ party, when they are breached.
- Conditions
- A condition is a term that is vital to the contract and can be said to ‘go to the root of the contract’. Breach of a condition will entitle the injured party to terminate the contract. Conditions are rare, and often terms that seem like they ought to be conditions, such as the right to payment by a certain date or in advance, are, in fact, not usually conditions. A good example of a condition is in contracts for the supply of goods (business to business) where section 12 of the Sale of Goods Act 1979 implies a term of good title on behalf of the seller. This will be a condition of the contract.
- Warranties
- A warranty is a more minor term of a contract and is technically defined as a term that is not a condition or intermediate term of the contract. Warranties are usually a promise or assurance that a statement about a fact or a set of facts is true. Breach of a warranty does not entitle the injured party to terminate the contract.
- Intermediate terms
- An intermediate (or innominate) term is a term which, depending on the nature and effect of the breach when it occurs, may entitle the injured party to terminate the contract. If, as a result of the breach, the injured party has been deprived of ‘substantially the whole benefit which it was the intention of the parties as expressed in the contract that it should obtain’ then the injured party will be entitled to terminate the contract, as though the term were a condition.
Condition, Warranty or Intermediate Term?
As we have discussed above, the classification of a term in a contract usually arises when one party breaches that term. It then becomes necessary to classify the term to determine whether the injured party is entitled to terminate the contract (in addition to claiming damages – see What is Breach of Contact) but how are terms classified?
Assuming the contract is written, the document can expressly identify a term as a condition or warranty. In such cases, the court will usually accept that the term is as the contract says, unless statute provides otherwise, or the contract provides for a remedy for breach of the term which is inconsistent with that class of term.
Like the example of a condition above, terms implied by statute can be classified by the statute itself. In addition, some statutes set out what terms in a particular type of contract will be, for example, in sale of goods contracts section 10(1) of the Sale of Goods Act 1979 provides that terms stipulating the time for payments are presumed to be warranties.
If the contract does not classify the term, and it is not classified by statute, then in the event of a dispute the court will determine the class of the term. The court will look at the wider facts surrounding the formation of the contract and the intention of the parties at the time to determine whether it makes commercial sense for the breach of the term in question to entitle termination of the contract.
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