The definition of a contract is as follows:
A legally binding agreement with specific terms between two or more persons or entities.
However, the definition is only part of the story, as contracts come in many different shapes and sizes to suit all occasions. It is, therefore, vital that you understand the ramifications of a contract before the agreement is finalised.
Introduction to Contracts
Whilst almost everyone will have heard the word ‘contract’, not so many will fully understand how contracts arise and their application and relevance to both business and personal life.
Whether you are ordering something from Amazon on the internet, the agreement with your electricity supplier to a major order for 300,000 circuit boards from Korea, contracts will be involved. Most of the time the existence of a contract will go practically unnoticed and that is often evidence of a well-drafted contract. What you don’t want to find out, is that there is a problem with your contract when you are walking through the door of a courthouse with an unhappy party on the other side.
These are a few common areas which are involved with Contract Law in England and Wales. This is only a brief overview. Contact our team for further details and legal advice.
1) Privity of Contract
Only the parties to the contract may enforce the terms of the agreement. So, basically, if your name is not included on the contract you do not have an involvement with what goes on (or doesn’t) within the contract itself.
Contracts must contain mutual promises, or obligations, between the parties making the agreement. Consideration must have an economic value in order to be valid in a contract.
Whilst it is recommended that all business contracts should be in writing, it is not essential. A contract may be formed orally though there are obvious problems with this. Different parties tend to have different interpretations of what was agreed. It is always best practice to condense the agreed terms into writing, with a request that both sides confirm and acknowledge that the written terms reflect what was agreed.
4) Written Contracts
A contract containing a guarantee must be in writing. A guarantee is an agreement where one party agrees to pay the debt of another individual or company in the event that the third party defaults on the debt. Also, contracts relating to the sale, transfer, option or lease of land should always be in writing as these will be needed by various third parties, including those involved with future transactions, the land registry and where grant of probate is required. Contracts in writing are also required for the assignment or licensing of certain intellectual property rights.
5) Authorised Signatures and Persons
Legally, to bind a company to a contract, it must be signed by a person who has the authority to do so. This would normally be a director of the company, its solicitor, or a manager. Also, check those signing have ‘capacity’. In English law, an individual under the age of 18 does not have the capacity to enter into a contractual agreement. Contracts signed by drunks, the mentally ill, the certifiably insane can all be declared void by a court of law.
6) Ensure the Details are Correct
Check that the name of the company is written correctly both in the agreement and on any invoices that are submitted. Getting this wrong can invalidate a contract or even change the nature of the liability of the parties doing business.
7) Which Standard Terms apply?
Also known as the “battle of the forms”. The issue is whose standard terms apply to the transaction? Usually, the ‘winner’ is the party who fired the last shot, that has its standard terms and conditions incorporated into the agreement, not the company that sends them in first. Often if it’s a David v Goliath situation, Goliath tends to win this one as they can pick and choose more easily from parties to do business with.
8) Exclusion Clauses – are they worth the paper they are written on?
Even though case law has challenged this area time and again, it is still common to see in many contracts clauses which limit or exclude liability in the event of a breach. The courts have determined that clauses that seek to limit liability in the event of a fundamental breach are largely unenforceable. It is quite unreasonable for one party to seriously breach a contract and for the non-breaching party to have no or little legal remedy.
Exclusions clauses in standard term agreements are also likely to fall foul of the Unfair Contract Terms Act (“the Act”). This is particularly relevant when doing business with the public.
Where one party does not perform their obligations as per the contract they commit a breach of contract. A breach of contract is technically a failure to perform the contract in accordance with the strict terms. This can often be a complex area to interpret for the untrained layman.
The non-breaching party should place the breaching party on written notice of any breach of contract before issuing court proceedings. The attitude of the courts in recent years has been to push parties towards mediation of contractual disputes in order to resolve differences.
It is open to a non-breaching party to repudiate a contract in the event of a very serious breach of a contract. Repudiation means giving up the agreement and considering the contract to be at an end due to the breach committed by the other side.
Need more assistance or legal advice?
rhw solicitors have a commercial team with a vast amount of experience and know-how and we are able to advise and assist in all aspects of contractual agreements including the creation of new contracts and amendment of current agreements.