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.
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:
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:
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.
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 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:
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.
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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