What is a Contract?


What is a Contract?

Under Contract Law, contracts, in its simplest form it is an agreement between two or more parties which is enforceable by law.

contracts

Contracts play a big part in our everyday life and existence. Contracts will affect everyone in different ways, sometimes big, sometimes small. Contracts arise in a variety of situations from employment contracts to contracts to buy and sell goods and services. At home, you will have a contract for the supply of utilities, gas, electricity, water, for your television, and virtually everything to do with your daily life.

Any insurance that you may have is in itself a contract.

Contracts are not always available in a written format, they can be verbal or written. A verbal contract is just as enforceable (in certain scenarios) as a written one provided there is no dispute over the substance of the contract. Contracts are may arise in different ways.

For a contract (which is an agreement) to exist under Contract Law there has to be an offer and an unqualified acceptance.

The contract process must start with an offer. The offer is an intention or willingness to contract on certain terms. This allows the other party to agree and accept the offer therefore forming the basis of an agreement.

Any offer is open to acceptance at any time until it revoked unless there is a time for acceptance specified in the offer.

If the acceptance is qualified where someone says that they will accept the offer subject to certain changes, then that qualified acceptance is not acceptance as such but a counteroffer which then must be accepted by the initial offering party.

For a contract to be viable under UK Contract Law, the offer must be communicated. In other words, unless the other party knows about the offer there cannot be an acceptance.

The relationship, contents and validity of an agreement between two or more persons including companies or other business types are governed by a set of rules regarding the sale of goods, provision of services or an exchange of interests or ownership.

This can be seen as a wide definition, it still does not cover all areas or situations which contract law will apply. This is due in part to the vast and varying situations in which contracts can apply on a daily basis.

Requirements for valid legal contracts

For a contract to be valid it requires to have the following:

(1) An agreement;

(2) The intention to create legal relations.

(3) Consideration (unless the Contract is in the form of a deed which then does not need consideration). However consideration is simply something of value passing from one person to another. By value, it doesn’t necessarily have to be monetary, it could be something that a person has done or passed over.

By themselves, these three requirements are treated separately but in reality must be looked at as a whole.

It is worthwhile talking briefly about goods for sale in the shop. These are not offered for sale! Goods for sale in the shop what is called in legal terms “an invitation to treat”. The buyer makes the offer to buy and shop accept it by conduct (taking the money). For this reason, if something is incorrectly priced in the shop, although many shops will honour that price, the shop does not have to do so.

As always, there is case law on this and here are just a couple: Pharmaceutical Society of Great Britain v Boots 1953 and Fisher v Bell 1961.

An advertisement is also generally an invitation to treat you want to read a little more then have a look at this case Partridge v Crittenden 1968.

When does a contract begin?

A contract comes into effect when it is agreed, that is, when there has been acceptance of the offer unless there is a different time specified in the offer. Unless the offer is conditional, then the contract starts when all conditions are met.

The acceptance can be made by words or by conduct. Acceptance occurs when the person making the offer (offeree) by words or conduct gives rise to an understanding that the offeree consents to the offeror’s terms.

And acceptance cannot be made by silence. So, if someone makes an offer they cannot for example say “I offer you £10 for XYZ and if I don’t hear from you by 5 o’clock tonight, I would take it that you agree”. There is case law on that which has been around for a long time; Felthouse v Bindley, a case from 1862.

Enforceable terms

  • For a contract to be enforceable, the contract requires certainty of terms. This means, for an agreement to be a contract, it must be clear what the terms of the contract are. If any important terms are not agreed then the agreement is not a valid contract. It is advisable to seek legal advice if you are unsure about any elements of the terms and their impact.
  • If the terms of the contract require a further agreement because they are uncertain then the contract is unenforceable.

If there is no agreement on identical terms between those concerned there is no contract for a court to enforce.

What is an Illegal Contact?

If a contract is illegal it will not be enforced by a court or tribunal. Contracts that have been created for an illegal purpose is void and will not be enforced by the courts. It is also worth noting that mistakes or misrepresentations can make a contract void. If you transfer assets under an illegal contract these cannot under normal circumstances be recovered albeit with a few exceptions.

It is important to note there is a difference between void and voidable contracts. A contract that is void is not a contract because it will not be enforced by law and it was always void from outset. Voidable contracts are considered to be contracts are not necessarily void from outset but can be made void.

Two people who agreed to carry out an illegal act cannot therefore rely on the court to enforce the contract as the contract will be void, because neither party can go to court to enforce the terms. If for example I pay someone to beat someone up, and they take the money but don’t carry out the allotted assault, I can’t take them to court to get my money back or make them carry out the beating! The courts will simply not enforce any legal contract.

However this has a rather more practical application. If a person offers to pay cash to avoid paying VAT that is conspiracy to defraud HMRC and in whatever the job was that was being paid for with unsatisfactory or the money wasn’t paid in full, if this was raised as a defence, court would not enforce the contract.

How do you know if you have a legal contract?

As mentioned earlier, the agreement element of a contract comes in the form of offer and acceptance. One party makes an offer to another. For example, one person offers for sale a watch for £100. As long as the other party agrees with this valuation and accepts the offer and the terms then the contract has been established. If the watch was stolen the contract would be voidable if the original owner came forward and wanted it back.

In consideration of!

The consideration element of a contract is the negotiating element of a contract. So for example if an individual goes to buy a magazine, one party’s consideration will be the magazine and the other party’s consideration will be the money to pay for the magazine. Both parties are providing a mutual benefit to the other.

Should a contract not be performed immediately, the promise to do something or offer consideration will itself, be enough to create a legal contract.


The intention to create legal agreement

An intention to create a legal agreement is essential to establish the presence of a contract under contract law. To distinguish between contracts created for the determination of being legally binding with other contracts that are in essence mutual arrangements e.g agreements between friends to meet up for a drink or choices made in relation to family matters.

Generally there is no written requirement needed in creating a contract and most can be made verbally. Exception apply is in cases involving the sale of land or property which is covered by a variety of pieces of legislation starting with the Law of Property Act 1925 which states that an agreement for the sale of property must be evidenced in writing and signed by the parties.

Hence, when we buy a house, we “exchange contracts”. The actual transfer itself transfers the property from one person to another is a different thing altogether and the same piece of legislation specifies that it must be by deed which has its own requirements. There are therefore you will see two elements of buying a house or of the property, 1: the sale contract and 2: the transfer deed.

Family issues can sometimes be a problem. As an example, one family member lends money to another family member on an informal arrangement that it will be paid back at some stage. There is a falling out and the party requiring to be repaid decides to take the other family member to court.

Whether it would succeed in court or not would depend on whether a judge thought that it was an agreement intending to create legal relations when what it was simply an informal family arrangement. The secret is to get everything in writing if possible.

Bilateral and unilateral contracts

On the whole the majority of contracts are bilateral. This means that both parties to the agreement undertake a kind of obligation and duty to each other.

Where a unilateral contract is formed, in exceptional circumstances, only one party to the agreement is bound its terms. This type of contract usually arises in circumstances where a reward is offered for the return of a lost item.

With only one party acting upon this, this would be whoever is offering the reward for the return of said missing item and is the only party required to do anything. No one is obligated to search for the lost item that is the choice of the person who wishes to do so. Both parties, however, will receive benefit of some sort. One will get their item returned and the other a cash payment.

Contract law is a complex area of law with a lot of exceptions. It is best, if you are unsure to seek legal advice from a qualified practitioner.

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