Contract Law 101: What You Really Need to Know
Note: This article deals with contract law in the United Kingdom
Our lives are governed by contracts. You may not believe it, you may not necessarily like it but it does not make it less so. From doing your shopping to getting on the bus to doing your job, the influence of contractual law can be seen. As a consumer, you are protected. There are still areas that need defining and tightening but by and large, the law is a strong buffer against abuse. But this area can leave people a little confused, and many lawsuits come about because of a breach of contract.
With the advent of technology, especially with the Internet and e-commerce, it can be difficult to draw legal line, but the law is catching up. So this article will act as a starting point so that you as an individual--and possibly as an organization--have an idea of your rights and obligations.
A contract is an agreement or a promise that has legally binding rights and obligations which the courts can enforce. A contract can be written, oral or implied. It is preferred that contracts be written but that is not always possible. For example, if you buy a sandwich and pay for it, that is a contract. There is no need to sit down and formulate a written agreement. The main problem with oral contracts is that it can be difficult to prove the actual terms because it is only the parties that can attest to what they were after the fact, and if there is a disagreement, the courts have to decide who is telling the truth and that can be very hard. The law can be vague and the case law (the results of previous lawsuits) is inconsistent. This is an important consideration when making oral agreements. Their use is limited. For example, you cannot sell your house using an oral contract, or give someone more than a limited amount of money subject to an oral contract.
There are certain key elements that need to be present (in the common law system) in order for a contract to be formed. They are:
Offer - an offer can be defined as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed" (Treitel, 2007)1. Put in layman's terms, an offer is a statement of the terms by which the person offering them would like to be bound. An offer can be expressed in many ways - letter, email, fax even someone's conduct as long as it makes it clear on what basis and terms the offeror is prepared to contract.
The key case in UK law is Smith v Hughes 2. The case established that the intention be judged by the courts objectively. In deciding this case, the courts were strongly advised not to look at the contracted parties' intentions, but how a reasonable person would view the situation in which the contract was formed.
There is a difference between an offer and an invitation to treat. An invitation to treat shows a party's willingness to enter into a contract. For example, advertising a moisturiser does not constitute an offer; displaying goods in a shop window does not constitute an offer but an invitation to treat.
Acceptance - happens when someone agrees totally and completely to the terms of an offer. Even if someone did not intend to be bound by the terms of the agreement, that is no defence, especially if their behaviour demonstrated their assent to the contract. The key legal term in this area is 'consensus id idem.' It was thought to mean a 'meeting of minds' but actually it means "agreement to the same thing." (Austen-Baker, 2000). There are certain rules regarding the acceptance of an offer. They include:
• You must let the offeror know that you have accepted the offer. It can be via a phone-call, an email or even by your conduct. Until the offer is accepted, it can still be withdrawn. The only exception is in relation to unilateral contracts--i.e. contracts where one of the parties offers to do something in return for an act of the other party. The main example in this area is the reward for the safe return of something. Only one party is bound to do something. No-one is contractually bound to go and find the object in question but if they do and they return it, then they are entitled to the reward.
• Only the person who was offered the terms can accept them unless an approved agent is in place to accept the offer on the offeree's behalf.
• Silence does not necessarily mean acceptance - Felthouse v. Bindley (1862) 142 ER 1037 but certain behaviour can indicate or infer acceptance Rust v. Abbey Life Assurance Co. Ltd  2 Lloyd's Rep. 334 and Saint John Tugboat Co. v. Irving Refinery Ltd (1964) 46 DLR (2d).
• If there is a method of acceptance laid out in the agreement, then acceptance must by these methods or by some other means that is equally effective. Unless exact wording on this area is laid out, then an alternative and effective method can be used Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370.
If acceptance is given under duress or undue influence, it will not be binding.
Consideration - is one of the most debated aspects of contract. The idea behind it is that each of the parties to a contract bring something to the table. This is a requirement under common law but in many situations in common law and civil law, it is not needed. It is known as the 'price of a promise.' A party to a contract must be able to prove some sort of advantage (or detriment) to the other. There are some rules governing this area:
• The consideration must be sufficient but not necessarily adequate e.g. the consideration does not need to be a fair and reasonable exchange for the promise.
• It must be in the present and not the past
• It is not considered valid consideration to do something that you are contractually obliged to do anyway
Intention to create legal obligations - When forming a contract, both the parties need to make sure that they intended for their agreement to have legal consequences. That is why the courts steer clear of domestic or social agreements as they are, by and large, unenforceable.
Legal Capacity - Both parties need to be legally capable of entering into a contract. For example, agreements cannot be made with minors or someone who is mentally unable to understand what they are entering into.
Formalities - The contract cannot be contrary to public policy, or illegal. It can be oral or implied but oral contracts are not enforceable under certain circumstances.
There are some terms that must be included in a contract. They include:
• The parties to the contract
• The time limitations involved in the execution of the contract
• What goods/services are involved in the contract
• Intellectual Property rights
• Confidentiality rights
• Any payment provisions
• Termination or indemnity for breach of contract
If any of the terms of the contract are uncertain or incomplete, then in the eyes of the law there is no contract or agreement. If attempts have been made to resolve these issues are unsuccessfully, then the court can sever and declare these terms void. This is subject to a subjective test.
A contract can be set aside due to:
• Misrepresentation - a false statement made to induce someone into entering into a contract
• Mistake - Incorrect understanding of the contract and its terms
• Incapacity - if one of the parties do not have the legal capacity to enter into a contract
• Duress and undue influence
Remedies for breach of contract include damages and specific performance i.e. requiring that the contract be fulfilled. The judgment awards monetary damages to compensate the subject of the breach and make an example of the person who breached the contract.
So there you have it, an introduction to the sometimes murky world of contract law. It governs many aspects of our lives and should be given the respect it deserves by individuals and businesses alike ( will be sure to tell that those who are still reeling from the bank charges decision)...
Take care and God Bless
Ngozi Nwabineli © 14th January 2010
Disclaimer: THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY. It is NOT meant to replace professional legal advice. If you are thinking about initiating or undertaking legal action of any type, I strongly advise that you seek and employ qualified legal counsel.
1. G.H. Treitel, The Law of Contract, 10th edn, p.8.
2 (1871) LR 6 QB 597