CONTRACT LAW

This is a sample from the Contract Law Core Series.

CONTRACT LAW

Introduction to Contract law

The General Ideology

The origins of the principle of a ‘contract’ can be traced back to the Middle Ages. Much of modern contract law developed in the nineteenth century alongside economics, and played a large part in the Industrial Revolution. Contract Law has an extremely broad application in practice, from consumer transactions in shops and online, to the commercial sale of goods in business and the supply of individual’s services and skills. It also includes distribution of goods, franchising products, licensing, intellectual property trade and ownership, finance, security, and even employment, as contracts are essential ingredients in this type of formal relationship. A good understanding of Contract Law is fundamental for all of these many areas of law, because each of them is linked to Contract Law’s basic and general principles. This can also be said for many other types of commercial transactions. Many contract disputes are often left to be resolved by law firms, but can also be settled outside of court due to, as you will learn, what the contracts themselves provide in terms of protection.

When reading the easily laid out chapters and sections in this application, you will learn that many modern business transactions are difficult to join with some well-established principles of Contract Law. This is a common thing when you reach the more advanced contract work in practice, where the impetus is mainly directed towards drafting contracts in order to avoid the application of the law. On the other side of the coin, there is equally strong impetus to test and push the boundaries of the existing laws. This is, for the most part, the case in transactions applicable to the Sale of Goods. It is noteworthy to reflect on the words on Professor Mckendrick (2008) here, who has suggested: "My own view is that we are moving slowly in the direction of a law of contracts [not contract] as the 'general principles' decline in importance.” Despite this, there will always be general principles to guide the courts and upcoming lawyers, such as yourself, when tackling contract disputes.

Sources of the Law of Contract

As we have established above, Contract Law is a broad subject with many specific applications into different areas of law and aspects of our daily personal and professional lives. We also saw that its origins are in the Middle Ages, with principles largely influenced by judge’s decisions in cases at the time. It was, and still is, mainly a common law subject. This means that its rules and principles have been expressed and established by the judiciary when they make judgments in real life cases. The main period of development of the common Law of Contract was in the nineteenth century, which, as a period of considerable commercial and industrial expansion, saw an increasing number of contract disputes brought before the courts.

An overriding principle generally followed by the courts at this time was that of freedom of contract, which states that parties of full capacity (i.e. not children or the mentally infirm) should be free to make whatever agreements they wish so long as they were not for an illegal purpose and subject only to remedies for recognised unfairness, such as misrepresentation or duress. An outcome of the principle of freedom of contract was the principle of sanctity of contract, namely that contracts freely entered into by people with full rational capacity ought to be enforced by the courts.

The Application of These Principles in Contract Law

The freedom and sanctity of contract principles was expressed by Sir George Jessel in Printing and Numerical Registering Co v Sampson (1875):

“... if there is one thing more than another that public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by Courts of Justice.”

This expression simply means that any competent and reasonable person has complete choice and mastery over how they enter and conclude their contracts. However, towards the end of the nineteenth century and throughout the twentieth century, there were an increasing number of Acts of Parliament that addressed the principle of freedom of contract. This was because it was increasingly recognised during this period that pure laissez-faire (do it yourself) application of the principle of freedom of contract often led to injustice. As a result of gross inequality of bargaining power between large companies on the one hand, and either consumers or employees on the other, freedom of contract could be abused; for example, in standard form contracts (template agreements) or through the wide use of exemption clauses (a term in a contract that seeks to restrict the rights of the parties to the contract).

The current position

A contract is an agreement that is binding and legally enforceable. This kind of agreement is the most frequently used kind of legal dealing and happens in nearly every case where something is sold or purchased, from selling a multi-million pound yacht to buying a lunchtime snack from your local supermarket. Some other examples of contracts include contracts for the sale of goods, sale of land, contracts of employment, contracts of hire, and contracts for the provision of services. Contracts can be made in writing, may be oral (spoken), or may be identified by someone’s actions. Most contracts have two parties, but there can be more. However, not every agreement will amount to a contract that can be enforced by law. Some social arrangements between people or contracts that offend public decency (i.e. I will pay you to expose yourself in Lincoln’s Inn) and public policy, or those that involve criminal acts, are all examples of contracts that a court would not be willing to consider binding, and are therefore unenforceable.

Different Ideologies of Contract Law

With the development of a free market in a globalised world based on the division of work, this capitalistic 21st century society required a flexible legal method of protecting the exchange of goods and services. Many legal practitioners decided to respond to this pressing social need from the beginning of the 20th Century. They transformed "Contract Law" from the unwieldy and complicated system it was since the sixteenth century into an instrument of virtually unlimited usefulness and applicability. Contract, therefore, became the crucial tool of the modern businessman, allowing him to go about his business in a rational way. Rational behaviour within the setting of modern society is only possible if agreements can be respected. The contract is, however, a tool that everyone can and does use in their everyday lives. For instance, when you buy a mobile phone, you are often receiving it for seemingly nothing on the condition that you pay a specific fee for your chosen telephone service for a certain period of time. In doing this, you are both exercising your own right to freedom of contract, in that you pick which tariff you use, and the sanctity doctrine, in that you expect that service to be maintained for a certain period in exchange for the money you provide the service provider in return.

The Market Principle

This principle promotes individualism and is a place for competitive exchange of goods and services. The functions of a contract are to facilitate competition as well as exchange. This ensures bargains must be kept subject to fraud, mistake coercion and so on, because it places emphasis on a duty to honour the agreement and not to behave in a way that will have a negative impact on the other party’s interest in the agreement. These include means such as misrepresentation and non-disclosure of information. A contract’s security gets recognised in one of the doctrines of law; that is the objective (factual) approach to contract intention. It also accommodates subjective (a subject's personal perspective, rather than that taken from an independent, objective angle) mistakes and third party purchasers. In order to protect an innocent party in the marketplace, Contract Law epitomises that people’s expectations measure in damages, as a realistic deterrent for the non-performance of an obligation by any of the contracting parties. The ground rules of contract, therefore, should be clear, with clearly defined penalties. This will, as a result, avoid market inconvenience. This is an underlying principle of Contract Law. It is to comply with creating a level playing field for competition, with no one being placed at a disadvantage at the expense of another taking advantage and benefiting from that profit. English Contract Law holds that it is paramount for a person to be able to achieve his/her goals, but not at the expense of another trying to achieve his/hers.

The Individualistic Ideology of Contract Law

Judges tend to not intervene with respect to contracts. Any potential party to a contract should enter the market using their own independent reasoning, in order to determine which bargains most potentially benefit them, strike them, and stick to them. The formal names that govern this behaviour are the doctrines of:

1) Freedom of contract

2) Sanctity

This freedom permits parties to freely choose others as consensual contractual partners. They need to be free to formulate and decide upon their own terms, as arguably no single definitive framework can possibly accommodate the unique distinctions of people’s characters that form what they want to see in a contract and how they want to benefit from it.

However, the development of many large corporate enterprises in both the public and private sectors has made it impossible for the weaker party to actually exercise freedoms, because of the pressure to forge an agreement with big companies. Therefore, a party could be held to the will of these more economically powerful contracting parties, as opposed to exercising their right to an equal tender on a level playing field. The sanctity of contract is also explicit in that parties should be treated as masters of their own bargains. Those entering into contracts should be able to maintain assurance that the terms of that agreement will be followed without breach, or a way in which the other party can exploit them to gain more than the original terms stated.

Consumer Welfare Principles

Consumer Welfare principles presuppose that consumer contracts must be regulated closely and commercial contracts, although competitive, must be subjected to far more regulation than market individualism. There are four main principles to consider:

1) Principle of Constancy: A person should not encourage another to act in a certain way or form a specific expectation and then act inconsistently with the encouragement.

2) Proportionality: Remedies subject to the seriousness of the breach.

3) Principle of Bad faith: A party citing a good legal principle in an attempt to exploit another consumer should not be allowed to exercise it. No man should be able to profit from his wrongdoing.

4) The Principle of Exploitation: A stronger party should be prohibited from exploiting the apparent weakness of another party’s bargaining situation and parties should be taken to have a relationship that will not lead to one exploiting the other.

The Nature of Agreement: The Objective Approach to Contract

Agreement occurs when one person makes an offer that is accepted by the other person. Provided consideration and intention to create legal relations are also present, there is a contract.

“A contract is an agreement giving rise to obligations which are enforced or recognised by law. The factor that distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties. This proposition remains generally true, even though it is subject to a number of important qualifications.” (Treitel: 13th Revised Edition 2011) Chapter 1 – 1-001.

The Elements of a Contract

In order for a contract to come into existence, one of the parties (namely the offeror) has to make an offer that is explicitly clear with certainty at the end and the other party (the offeree) has to respond in providing a statement that is just as clear, and with the certainty that they are willingly accepting the offer.

This can be broken down into three essential elements:

Agreement

Intention to create legal relations

Consideration

To include offer and acceptance

The intention to contract and the necessary capacity (capability)

Something being given by each party

If one of these elements missing = NO contract

Correct Form of the Contract

It does not usually have to be in writing. It can be oral, by inference or conduct, or by a combination of these things. Some kinds of contract/agreement must be made and/or evidenced in writing:

1. Contracts under seal (also known as ‘specialities’): Most formal contracts; all other contracts are called ‘simple’ contracts, whether in writing or not.

2. Contracts which must be in writing: Bills of exchange and promissory notes (The Bills of Exchange Act 1882), hire-purchase agreements (The Consumer Credit Act 1974), the sale of land (The Law of Property (MP) Act 1989).

3. Contracts which must be evidenced in writing: Contracts of guarantee (Statute of Frauds 1677).