Contract law: underpinning ethical business transactionsPosted on: July 29, 2022
by David Diaz
Contractual agreements are part and parcel of our daily lives.
The main aim of contract law is to allow people to conduct business, as contracts form an essential, common and everyday part of economic activity. Companies and consumers alike rely on contracts to ensure that transactions happen smoothly: the sale of goods, the licensing of products or services, the basis of employment agreements, and so on.
Contracts aim to remove ambiguity and misunderstanding, allowing all necessary parties to conduct business confidently and on clear terms.
What is contract law?
Thomson Reuters defines a contract as a legally binding promise (written or verbal) by one party to fulfil an obligation to another party in return for consideration. They state that a basic binding – and therefore legally enforceable – contract must comprise four key elements:
- Offer: One party – the offeror – makes an offer.
- Acceptance: Another party – the offeree – accepts the offer.
- Consideration: Each party provides consideration to the other, which may be payment or any value given at the counterparty’s request.
- Intent to create legal relations: All contracting parties have an intention to be legally bound by the terms of the contract.
The parties involved must have contractual capacity. This means that they are legal entities recognised by law: companies; limited liability partnerships; and individuals of at least 18 years of age.
Contract law is the body of civil law that relates to the making and enforcing of such contractual agreements. It governs their making and upholding, and seeks to find a resolution if or when a breach of contract occurs.
Different types of contracts
Contracts differ considerably and are determined by a host of factors, including: the parties involved; the considerations; the specifics of the given situation; and the transactional terms of a contract. Some examples of different contract types:
- Express contracts, where specific terms for the contract are given.
- Conditional contracts, where contractual fulfilment depends on meeting specified conditions or achieving specified performance.
- Joint contracts, where multiple parties are involved.
- Implied contracts, where the contract is situational rather than explicit and often entered into verbally.
- Unconscionable contracts, where one party holds considerably more bargaining power, or other type of power, than another. Contracts characterised by unconscionability are often unjust.
- Adhesion contracts, where one party holds more leverage than another.
- Option contracts, where the option of entering into a different contract at a later date is provided.
- Fixed-price contract, where a set price is agreed upon by the parties.
Freedom of contract is a term that refers to the autonomy of involved parties to bargain and agree to whatever terms they like, without outside intervention from government.
What is a breach of contract?
While it’s vital to ensure that the right contract is in place for any transaction, sometimes breaches of contract by the other party are unavoidable despite careful preparation of written documents or good working relationships.
A violation of any of the agreed-upon terms and conditions of a binding agreement, by one or more of the parties, is classed as a breach of contract. Breaching the terms of the offer is protected by privity of contract, meaning that all parties are bound by the contract and have obligations of some form. Breaking privity carries legal consequences. For example, if a homeowner hires a building contractor to add an extension to their property and the contractor did not fulfil every element of the project as outlined in the contract, a breach of contract has occurred. In the same way, if the contractor completed the work and the homeowner did not compensate them as per the contract, then they would be in breach of contract. In this case, both parties act as promisor and promisee.
What happens when a breach of contract occurs?
There are two main options: seek mediation from a lawyer who specialises in contract law, or sue the other party and take the case to court. Parties may wish to refer a case to the Court of Appeal. Arbitration may also be a possible route, where the parties involve an independent, impartial third party to settle the dispute. An example of this is the Financial Ombudsman Service, which settles complaints between consumers and businesses that provide financial services.
The Unfair Contract Terms Act 1977 sets limits on the extent to which liability for breach of contract, negligence or other breaches of duty can be avoided by means of contractual provisions, such as exclusion clauses. Where breach of contract is found, legal remedies often include:
- Compensatory damages
- Punitive damages
- Paying additional money to compensate the wronged party
When is a contract considered void?
Many companies – and individuals – make the assumption that if there is no written contract, there is no official contract: this isn’t the case. However, there are plenty of situations where a contract is considered null and void.
During the contract formation process there cannot be any vitiating factors, which are aspects of the contract which render it invalid. Vitiating factors can include: the law of mistake – such as mutual mistake and common mistake; misrepresentation; undue influence; Non est Factum; economic duress; and illegality. In such cases, rescission can often be granted to the plaintiff and repudiation of contract may occur.
In the case of a force majeure – where an extraordinary event directly prevents one or both parties from upholding their contractual obligations – a contract is deemed void. For example, the COVID-19 pandemic rendered many businesses unable to fulfil contractual agreements despite their best efforts and commitment to fulfilling their obligations.
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