Understanding the Fundamentals of Contract Law

Section 1:

Contract law is about the enforcement of promises. Not all promises are legally binding. Courts look for the presence of certain elements which when present the agreement becomes a contract.

A contract begins with an offer. This is an expression of willingness to contract on specified terms, made with the intention that it’ll be binding once accepted by the person to whom it is addressed. There must be an objective manifestation of intent by the offeror to be bound by the offer if accepted by the other party. Therefore, the offeror will be bound if his words or conduct are such as to induce a reasonable third-party observer to believe that he intends to be bound, even if in fact he has no such intention. An offer can be addressed to a single person, to a specified group of persons, or to the world at large. An example of the latter would Carlill vs Carbolic Smoke Ball Company (1892). An offer may be made expressly or by conduct.

This raises the point that there are documents that look like a contract that aren’t legally binding. Such as an invitation to treat.

An invitation to treat is an indication of readiness to conduct business and invite the other party to make an offer or commence negotiations. A display of goods in a shop is commonly an invitation to treat as shown in Pharmaceutical Society vs Boots (1953).

Contracts are either bilateral or unilateral. A bilateral contract is an agreement between at least two people or groups. Most business and personal contracts are bilateral. In bilateral contracts, a party has promised a particular action to another party in response to that party's action. Whereas, unilateral contracts, involve an action done by one person or group alone. Unilateral contracts allow only one person to make a promise or agreement.

Acceptance is a last and definite expression of assent to the terms of an offer. Yet again, there must be an objective indicator, by the recipient of the offer, of an intention to be bound by its terms. An offer must be accepted in accordance with its terms to form an agreement. It can be accepted by conduct. Acceptance has no legal consequence until it is communicated to the offeror (because it could cause issues to the offeror to be bound without being aware that his offer had been accepted).

The exception to the rule is that a postal acceptance. It takes effect when the letter of acceptance is posted, even if the letter becomes lost or delayed. However, the postal rule doesn’t apply if it is stated by the express terms of the offer.

An offer that requires acceptance to be communicated in a particular way can usually only be accepted in that way. If acceptance occurs through an immediate medium for instance email, it will become binding at the time and place of receipt. Note that an offeror cannot demand that the offeree's silence amounts to acceptance. When a party attempts to vary the terms of an offer this is not acceptance it is a counteroffer. Which the original offeror can either accept or reject. For example, where the offeror offers to trade on its standard terms and the offeree implies acceptance, but on its own standard terms, that represents a counteroffer. Making a counteroffer amounts to a rejection of the original offer which cannot subsequently be restored or accepted (unless the parties agree).

An offer may be revoked at any time before its acceptance; however, the revocation must be communicated to the offeree shown in Byrne vs van Tienhoven (1880). Although revocation need not be communicated by the offeror personally (it can be done by a reliable third party), if it is not communicated, the revocation is ineffective. For a unilateral offer to be revoked it must be published to the public.

In common law, a promise is not binding as a contract without it being supported by consideration (or it is made as a deed). Consideration is an item of “value' which is given for a promise and is mandatory in order to make the promise enforceable as a contract. This is conventionally either a loss to the promisee and/or some benefit to the promisor. Consideration has to be sufficient but need not be adequate. Although a promise has no contractual force unless some value has been given for it, for example, Thomas vs Thomas (1842) the promise to pay £1 a year for rent was sufficient despite it not being adequate due to this being lower than usual rent prices. Courts do not, usually, question whether an adequate value has been given (in the sense of there being any monetary correspondence). This is because they do not generally interfere with the deal made. Another rule about the sufficiency of consideration is that the consideration must be given after the promise for it to be enforceable. A promise given when the alleged consideration has been finalized is unenforceable. In the case of Re McArdle, the plaintiff renovated a house his siblings had a beneficial interest in when he asked them to pay towards it which they agreed to do it was decided that the agreement wasn’t enforceable as the work was done before the promise. For the promise to be enforceable before consideration it must meet three criteria:

1. The act constituting the consideration was done at the promisee’s request.
2. The parties must have understood that the work was to be paid for in some way.
3. The promise would be legally enforceable had it been made prior to the act constituting consideration.

Consideration cannot be from the past. Furthermore, the promisee must give the consideration. While consideration must move from the promisee, it need not move to the promisor.

There are three different types of existing obligations which can be claimed to be consideration.

1. Obligations that rise under the law, independently of any contract.
2. Obligations which are due under a contract with a third party.
3. Obligations which exist under a contract with a person who has made a new promise, for which the existing obligation is alleged to provide good consideration.

An example of the first obligation is a member of the public paying a public official to carry out one of their duties. The promise of payment would be unenforceable as there is no consideration due to the public official is only doing their job.

In the second situation which concerns the performance or the promise to perform, an existing obligation owed under a contract with a third party. The courts take the view that this can provide good consideration for a new promise, for example, the promise to marry in Shadwell vs Shadwell (1860).

Finally, the third existing obligation, that owed under a contract with the party making the new promise, this arises from the promise being clear but unrealistic in certain situations, the contract becomes modified to the extent where it is uncertain. An example of this is Williams vs Roffey (1991) where Williams was still allowed to collect extra payments for work even though he does not do more than he was contracted to.

Section 2:

In legal practice a condition is an obligation or event that should take place prior to another action. It is directly related with the objective of the contract and if this is breached then the contract is terminated, and damages can be claimed. An example, of this, is Poussard v Spiers (1876).

A warranty is an assurance or promise in a contract if this is breached it is only minor, but damages can be claimed. It is not directly associated to the contract it is a subsidiary provision related to the object of the contract. A case that shows the difference between the two is Bettini v Gye (1876).

Another vital part of a contract are implied terms are words or provisions that a court presume were intended to be included in a contract. Meaning that they aren't expressly stated in the contract. The Courts can infer these through four different ways; Statue, Custom, Law, and Facts.

Statue: The Sales of Goods Act 1979 is an example of a Statue. Such as S. 13 (1) there is an implied condition that the product will match the description.

Custom: Parties can imply terms into a contract if other contracts in the same custom can be rationally assumed to have that term. Therefore, terms that may be implied by custom are taken to be standard practice. For example, when contracting a plumber, it might be an implied term that they will bring their own equipment, as this is expected in the industry.

Law: Parties can automatically assume that terms implied by law form part of particular categories of contracts because of legislation or previous court decisions. If the contract falls into a given category, it might have specific default terms.

Facts: A court may include these types of terms in a contract to guarantee the document reflects the parties’ genuine intentions. Often, they are terms that do not think of expressly including in the contract because they ‘go without saying’. For example, it goes without saying that if you park your car in a car park, the grounds will be in good condition. Therefore, this term is necessary to allow the car park to function efficiently.

Incorporation of terms in English law is the presence of terms in contracts formed under English law in such a way that the courts identify them as legal. Three ways of incorporation: signature, notice and by custom.

Signature: a party is bound by a signature so it will be bound to the terms of the contract when they sign it. This is irrespective of whether they have read the terms or not. The law doesn’t allow someone to sign a document and then claim they are not bound to its terms on the basis that they didn’t read or know the terms.

Case Study:

L’Estrange vs F. Graucob (1934)

Notice: to do this the contracting party must complete three things. The notice must be given at or previous to the time of contracting, Thornton vs Shoe Lane Parking. Secondly, the terms in the document must be intended to have contractual effect. Thirdly, there must be adequate steps taken by the party to bring the terms to the attention of the other party.

Case Study: Interfoto Picture Library vs Stiletto Visual Programmes (1989):

Custom: in order for this to established there must be both consistent and regular transactions between the parties. Usually only relied on when the company has failed to fulfil standard practice and the failure has led to a harmful effect.

Case Study:

McCutcheon v MacBrayne [1964].

Construction is significant in the interpretation as it resolves vagueness, as interpretation cannot. When a word or expression has a linguistic meaning that is vague, then interpretation has completed all the work it is capable of doing. At that point, what we need is construction that allows us to draw a line (making the vague provision more specific).

However, it can be seen as less important due to the fact that courts see construction as very similar to interpretation. Once there is no ambiguity which interpretation handles then the contract cannot be vague therefore there is no need for construction.

A term is an expression of willingness by the parties to agree to abide by that obligation; part of the contract and has contractual effect. A representation is statement which induces the other party to enter the contract it is not included in the contract as it is made during the negotiation stages.

Section 3:

As mentioned in the paragraph above representation typically persuades a party to enter into a contract. However, if this statement turns out to be false then there is a misrepresentation. For the misrepresentation to be actionable then it must be expressly stated in the contract and the other party must have relied on this as a key element in the contract. The impact of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to withdraw the contract and/or claim damages. There are three different types of misrepresentation; fraudulent, negligent and innocent.

Fraudulent: where the statement made is either; with the knowledge that it is false, lacking belief in its truth, or irresponsibly, careless as to whether it be true or false.

Negligent: is a statement made without rational grounds for belief in its truth. The burden of proof being on the representor to prove they had reasonable grounds for believing the statement to be factual.

Innocent: where the representor can demonstrate reasonable grounds for belief in the truth of the statement.

In contract law, there are three types of mistakes that will each be explained; common, unilateral, and mutual. A common mistake occurs when both parties are factually incorrect about the subject matter of the contract. This mistake may mean a court can void the whole agreement. If, however, the contract contains a small error involving to the subject matter, it is unlikely the court will rule that the contract is void. Instead, the court will probably ‘read the contract down’, meaning that the parts that do not involve a mistake are still valid.

Unilateral: A unilateral mistake occurs where only one party is mistaken as to the terms of the subject matter. Frequently, this can lead to a one-sided benefit for one of the parties. For a unilateral mistake to render the contract void, the mistake must relate to the central terms and conditions of the contract, and the other party must have been aware of this mistake and then used it to benefit them when forming the contract.

Mutual: A mutual mistake is a common misinterpretation between the parties entering into a contract as to the intentions of the other party or a factual information in the contract. A mutual mistake will render the contract voidable: if the mistake goes to the heart of the contract, then the contract is void. If the mutual mistake relates to the quality of the subject matter the contract is not likely to be held to be void. If in light of the parties’ words and conduct, there is only one possible understanding of what was agreed – the contract will still be legal.

The doctrine of frustration releases both parties from their contractual obligations where following the creation of the contract, the performance of the contractual obligations becomes either: impossible or drastically different. The ways a contract can be frustrated are:

• Destruction of the subject matter: Taylor v Caldwell 1863.
• Personal incapacity will generally render the contract frustrated: Condor v Baron Knights [1966].
• Where the contract becomes illegal to perform it will frustrate the contract: Fibrosa Spolka v Fairbairn [1943].
• Where a contract cannot be performed in a specified manner: Nicholl and Knight v Ashton, Eldridge & Co [1901].
• A contract may also be frustrated where it is deprived of its commercial purpose: Krell v Henry [1903].

Duress is a means by which a person or party can be released from a contract, where that person or party has been involuntary forced into the contract. If this coercion can be shown to be accurate, then the contract entered into cannot be considered a binding agreement. Usually duress only related to duress to the person, which in effect required actual violence or threatened violence against the person or party to the contract. The application of duress has since expanded, and it is now recognized that duress may be economic in nature. It has been recognised that where duress has been shown, that any money paid over where there was no obligation to pay it and the person was in danger of damage to goods that it can be recovered.

Similar to duress is undue influence. This contains the taking advantage of someone through a position of power. Undue influence can only be exerted by someone in a superior position, or who has a duty to recommend the other. When the superior party applies extreme pressure on the other to agree to something they otherwise would not do, it is considered undue influence. This is not to say that strong recommendation or influence amounts to undue influence, for undue influence to be proven the persuasive actions must be disproportionate, affecting the other person’s sense of free choice. There are two types of undue influence, actual and presumed. Actual undue influence requires evidence that the contract was entered into as a result of an extreme pressure being exerted. The claimant must plead and prove the acts which they assert amounted to undue influence. Presumed is broken down into two sections. The first there is no requirement to prove that improper influence was actually exerted. Instead, it must be established:

1. There was a relationship which as a matter of law gives rise to a presumption of undue influence.
2. The transaction is one that cannot readily be explained by the relationship between the parties.

These relationships include parent and child, doctor and patient. The second is that there is a relationship of such a nature that one party, in fact, placed their trust and confidence in the other to protect their interest. Any relationship is capable of amounting to these examples include husband and wife, employer and employee, etc. The important difference between the two is the fact that the trust and confidence relationship must be proved. In modern times it is no longer the case that wives will generally place all their trust in their husbands to deal with the financial matters although in some marriages this may be the case.

In contracts, remoteness limits the number of compensatory damages for a wrong. The traditional test of remoteness is set out in Hadley v Baxendale (1854). The test is, in essence, a test of foreseeability. That is, the loss will only be recoverable if it was in the contemplation of the parties. The loss must be foreseeable not merely as being possible, but as being not unlikely. However, crucial to this is the measurement of damages, which is a way to compute damages that are to be awarded to an injured person. In a contract, the measure of damages is intended to place the injured party in the same situation as if the contract was performed. Non-compliance with the terms of a contract and actual loss are the key factors for the measure of damages.