What is Contract Law?

What is Contract Law?

The law of contract is a set of rules governing the relationship, content and validity of an agreement between two or more persons (individuals, companies or other institution) regarding the sale of goods, provision of services or exchange of interests or ownership. While this is a wide definition it does not cover the full ambit of situations in which contract law will apply. The reason for this is due to the vast number of examples in which contracts can arise in everyday life.

Contract law has been more formally defined as a promise or set of promises which the law will enforce. Another definition and a somewhat competing view, is that a contract is an agreement giving rise to obligations which are enforced or recognized by law. Either definition confirms the involvement of the law by way of enforcement, suggesting that should there be an infraction or breach of the terms of the agreement then the aggrieved party may seek recourse via the Courts. As is noted above, a contract can arise is a plethora of scenarios; from buying a loaf of bread in the corner shop, to the sale of a house. It is unsurprising therefore that certainty is needed before the Courts will intervene to enforce any agreement. The law of contract has confirmed the basic foundations of any contract, regardless of its complexity and substance, that it must contain to make the agreement enforceable in law.

There must be an offer and this must be accepted to make an agreement. While this would in the first instance appear to be self explanatory, it is important to distinguish between what the law says amounts to a valid offer. An offer can be made orally, in writing or by way of conduct. Regardless as to the manner of the offer, it is the willingness or intention of the person making the offer (the offeree) which is of importance, and that is clearly subjective. If a person says that I want to sell this orange for A£1.00 but then mistakenly advertises it for 1p, and that offer is accepted, then a valid agreement will be upheld. Simply because there was a mistake in the offer, it does not invalidate the contract. There was an intention to sell on the part of the offeree. It is important to distinguish at this point however between an offer and an “invitation to treat”.

Parties may enter into preliminary negotiations or pre-emptive talks before entering into a contract. The issues they cover will not necessarily form part of the contract and are considered to be invitations to treat. A classic example of this is the produce on display at Supermarkets and on shelves. The price highlighted amounts to an invitation to treat only. The offer does not materialize until the goods are taken to the checkout and the price confirmed. At that point the customer can accept the goods and pay the total amount, thereby completing the transaction and formalizing the contract. A similar situation is evidenced in auction rooms, where the offer is made when bids are put forward by prospective purchasers and acceptance once the auctioneers hammer falls.

Just as important in contract law as the offer, is the legality of the acceptance. This must be an unqualified expression of assent to the terms of an offer. An acknowledgement of an offer would not amount to acceptance, nor would a statement of intent. There must be a clear unequivocal communication of acceptance of the offer on the terms put forward by the offeree. Any attempt to amend the terms of the offer would amount to a counter offer. This would then put the parties back to square one and the offer would be open for acceptance with the offeree becoming the offeror.

The importance of contract law here may not be clear at first glance. Contract law not only governs what happens when the contract breaks down, but it also establishes what the terms of the contract are, in the event of a dispute. While the contract may be self explanatory in what the parties intend i.e. you pay A£50 and I’ll give you this washing machine, there are of course terms as to the time of payment, delivery, condition of the goods etc that need to be established. The most important terms are of course the quality of the goods and the method of payment. Certain pieces of legislation will import terms into the contract without any acknowledgement or agreement between the parties that they will be so included. An example of this is the Sale of Goods Act 1979 which ensures that in sales to consumers by anyone in the course of a business, that the goods are of satisfactory quality, fit for their purpose and correspond to their description. Contract law protects the purchaser without his knowledge. The phrase usually displayed at checkouts regarding sales and offers, “This will not affect your statutory rights” refers to such implied terms.

The offer and acceptance are the visible conditions of the contract, but perhaps even more obvious is the requirement of consideration. This term refers to the exchange of money for goods or services, or something else of value traded between the parties. It is also perhaps the most complex and contentious of the requirements for a valid agreement. Without some form of consideration, the contract is nothing more than a promise, which is unenforceable under English Law. But it is not enough that the parties make this exchange of worth, it must be “valued” consideration as opposed to inadequate consideration. This concept of “valued consideration” refers to something that is capable of estimation in terms of economic or monetary value. Furthermore it is not enough that such consideration has taken place in the past, there must be contemporaneous value by way of exchange to create a formal agreement. These technicalities have led to a raft of case law upon the issue of what amounts to consideration, hence the importance of contract law to mediate any dispute.

With the agreement between two or more people confirmed as an agreement, containing an offer and acceptance, and the exchange amount to money or something in money’s worth, there must still be the requisite intention to create legal relations. While in a commercial transaction it would appear obvious that the parties to the contract intended to create legal relations, in a more relaxed and informal setting there may be a question over how serious the parties were being? This does not mean that individuals i.e. consumers are free to return goods on the basis that they were never aware of the intention to create such legalities. The Courts may draw an inference from conduct and common knowledge that shoppers are well aware of the binding nature of any agreement to purchase goods or services. What we are referring to is the scenario where one party mistakenly believes that there is no formal intention, and the other party has knowledge of that error but fails to inform them. The Court will apply an objective test to consider all the facts of each individual case. A case involving a pupil barrister who accepted an offer from a Barristers Chambers was held to be a binding contract between the trainee and the whole chambers, not just the pupil master. The absence of specific intention on the part of the rest of chambers was irrelevant. There was clearly intent from the conduct of the parties.

More informal agreements between co-habitants living in a quasi-marital relationship can lead to dispute, particularly upon the break up of that relationship. Historically there was a question about whether a contract would form when the “stay at home mother” would find herself without recourse via matrimonial legislation. The contract was said to relate to the offer to be maintained for life by the husband, which was accepted, and the consideration would be foregoing the right to earn a living and/or providing a home for the family. The only question was relating to the formal intention of creating legal relations, a hurdle that many women could not overcome. While alternative remedies in equity exist to remedy such a scenario, it is a useful illustration of how intention can negate what at first instance appears to be a valid contract. Of course, the most obvious way to ensure that any agreement shows the intention of the parties is just to write it down. A statement of “This agreement is not entered into as a formal legal agreement” would probably suffice.

This basic overview of the law of contract demonstrates its importance and need to stay in touch with modern developments. The next section will deal more fully with this issue in terms of the scope of contract law in every day lives but it is fair to say that the need for this protection is fundamental. An unknowing party can enter into a contract without being fully aware of the implications. The development of legislation such as the Unfair Contract Terms Act 1977 and the various Consumer Credit Acts have all evolved from the basic principles of contract law and the principle of putting the parties on as equal a playing field as possible.

Where is Contract Law used today?

As was mentioned above on several occasions, contract law permeates our day-to-day lives, and often we are not aware of its presence. While legally qualified individuals may be aware every time a contract comes into existence and note phrases such as “the customer uses this at their own risk” with a wry smile, the majority of society lives in blissful ignorance of how deeply indebted to contract law they are.
In the first instance it would be a useful exercise to list a few of the various instances of contract law coming into play when we may not expect it.

• Public Transport – every ticket bought on a bus train or on the underground forms a contract. This is a contract of services and the majority of terms will be implied rather than express. If one was to state the whole list of terms on the back of a ticket as to the obligations of the provider of the transport to the customer, it would result in a piece of paper resembling an instruction sheet from Ikea rather than a ticket.

It should be mentioned here that such express terms that form part of the contract must be present at the moment it was entered into. The terms of importance will usually be on display either around the point where a ticket is bought, or it will direct the customer to a full list of the conditions elsewhere.

• Employment – every employee must have a contract of employment with their employer. While it is a fact that some employers have not bothered with the formality of drafting a document setting out the rights and expectations of both parties, the Employment Rights Act 1996 will infer a number of basic rights for the employee in any event. The offer and acceptance of taking a new job is a given, as is the consideration (days work for a days pay). The intention is not necessarily so obvious but the relationship the contract creates leaves no room for discussion as to its formality in a legal sense.
• Any purchase of goods or services – while this is dealt with in more detail below, the sale of goods or services is the most basic form of contract. While we may not appreciate the scope of the law and its impact upon a basic purchase of e.g. a new car, the terms and conditions of sale, the various pieces of legislation importing terms and the case law stretching back more than 100 years on similar issues all have a bearing upon a customers (and suppliers) rights and obligations. It is of course rare for anyone to be made aware of all the terms in existence and the “small print” usually covers most things of relevance.
• Buying a house – most people who have become involved in the conveyancing process will recall the stress of waiting for the solicitor to confirm that they have “exchanged contracts”. While the ownership of a property in England & Wales can only pass by way of deed, the contract is pivotal. The contract will set out the terms of sale, including the price, items of furniture and fixtures that are being left behind and the date of completion. Once the purchase is completed and the monies paid, any issue that may be taken between the parties will have to be raised as a breach of contract. While in the majority of cases the axiom “Caveat Emptor” (buyer beware) will apply, the specific terms of the contract must still be fulfilled and depending upon the severity of extent of the breach, this will dictate the appropriate remedy available.

What can be seen above is that Contract Law is everywhere. From the purchase of a newspaper in the morning to the service of gas and other utilities, there exists a contract to govern most relationships outside the domestic scenario. It is understandable therefore that this area of law may be the most diverse in its impact upon everyday life, yet its principles remain comparatively straightforward. There are of course complex issues and certain types of contract (acquisitions and mergers, share holders agreements etc) require specific rules to govern their application, most contracts have a quality that allows them to operate without the knowledge of their existence.

The most influential and commonly used contracts are those relating to the purchase of goods and services. The Sale of Goods Act 1979 and Supply of Goods and Services Act 1982 have developed from a background of Caveat Emptor, where consumers were unprotected from sellers able to peddle goods that were less than of merchantable quality. While the image of “Del Boy” flogging various items out of a suitcase springs to mind, it was actually the larger and more commonly used suppliers of goods that took the brunt of this legislation. We mentioned terms as to quality and fitness above, and a multitude of cases have gone as far as the House of Lords to ensure the protection granted under a contract is enforced. We have contracts for the sale of goods when we do our weekly shopping, buy a new appliance or finally get that pair of shoes. Similarly contract for the supply of services exist over the cables service for the TV, the mobile phone company or the plumber who comes into fix the leak upstairs. However they are created, the contracts that we are party to are numerous and often we are not specifically aware of our obligations under them, save to pay what we have agreed to.

While we have focused on consumers and individual contracts, that is not to say that there are any fewer contracts that exist between companies, corporations, charities or even governments. Most companies will have several contracts for the services it obtains from other companies i.e. cleaning, catering, accountancy etc. There will be contracts of employment with every member of staff, as well as contracts with each shareholder as to the money they have invested and the dividends received each period. They will in turn have contracts with the customers who retain their services, or even other companies by way of merger or shared services within a larger agreement. This is a non-exhaustive list but a good example of how contract law not only creates the basis for the relationship between individuals, companies etc, but also regulates their rights and obligations and ultimately provides a solution in the event of a dispute. The scope of this area of law clearly has no limit.

Case examples

Carlill v. Carbolic Smoke Ball Co (1893) 1 QB 256 (CA)

This case involved the defendant company who produced and advertised smoke balls as a preventative measure against influenza and the common cold. The advertisement stated that they would give A£100 to anyone who used the product for three times a day for two weeks but still contracted one of these illnesses. The defendant also stated that they had placed A£1,000 in a bank account to demonstrate their sincerity. Suffice to say that the claimant took up the challenge and after roughly 8 weeks of continuous use she contracted the flu. Mrs. Carlill claimed the A£100 but the defendant refused to pay; they claimed that there was no contract in place for her to enforce the claim.
This matter progressed to the Court of Appeal. The defendants maintained that there was no intention to create legal relations and the advert amounted to nothing more than an invitation to treat. At no stage did the claimant tell them that she had accepted their offer. Nevertheless the Court of Appeal confirmed that there was in fact a contract in effect between the parties. This situation amounted to a “unilateral contract” whereby one party offers money in exchange for the performance of a stipulated act. Whereas normally an advert would amount to nothing more than an invitation to treat, the request for the performance of an act made it an offer. There was no requirement for Mrs. Carlill to inform the defendant that she had accepted it, the undertaking of the challenge was tantamount to acceptance.

There were arguments from the defendant that the wording of the advert was too vague for it to amount to a contract. There is always a requirement that the specifics of the offer are precise so as to avoid confusion. While there was some scope for interpretation, the Court adopted a literal meaning to the advert, which simply state that providing the claimant took the smoke balls continuously and then contracted any of those illnesses she would receive A£100. The deposit of A£1,000 into an account was a demonstration of the defendants meaning and willingness to rely upon their product in light of this challenge. The Court had no hesitation is finding in these specific circumstances that there was a contract under which the claimant was due A£100.

While this case demonstrates how the law of contract protects the party who in good conscience accepts the terms put forward by the offeror, it remains something of an anomaly. This situation would only be enforceable where the offeree was required to undertake a specific task, thereby removing the need for communicating acceptance and transferring an invitation to treat into a formal offer. There is also a lesson for the nave or careless when setting challenges and making proposals to others. A contract can arise even when the intention was to make an informal offer, but in the absence of a specific statement to that effect, the conduct of the offeror may infer the requisite legal intention.

Coward v. Motor Insurers’ Bureau (1963) 1 QB 259 (CA)

In this matter Mr. Coward and Mr. Cole were work colleagues who had an arrangement regarding shared lifts to work. Cole would drive his motorbike and Coward would ride pillion in return for a weekly sum of money. Unfortunately both were killed in a road traffic accident and the wife of Mr. Coward made a claim for damages against the estate of Mr. Cole. However Cole’s insurance policy did not cover pillion passengers and as his estate had no assets or money to satisfy the judgment, Mrs. Coward pursued the Motor Insurance Bureau (MIB).
The MIB have an agreement whereby accidents and consequential claims would be satisfied by the Government in circumstances where the driver has no relevant policy of insurance. However the rules covering this situation require Mr. Coward was carried for “hire or reward”. Consequently Mrs. Coward needed to prove that there was a contract in place between Coward and Cole for the lifts to work.

There was clearly an offer of transport and this was accepted. In addition the consideration exchanged by the parties was the service of transport and the money paid by Mr. Coward. However there was a question over how formal this arrangement was so as to amount to an intention to create legal relations. Once again this matter progressed to the Court of Appeal and it was decided that notwithstanding the regular payment of money in return for the lift, it was not so formal as to create a contract. There were no terms as to how long this was to last, what would happen in default of payment or the availability of transport, or anything written down so as to at least make their intention clear.

The practice of colleagues sharing a lift to work (or “car pooling”) is an accepted and wide spread practice. Parties will usually agree that one will take their car and in return the others will make a contribution towards the petrol costs. This is usually a matter of convenience, reducing costs or even a conscious decision to reduce emissions from each separately taking a vehicle. It cannot be said however that the agreement is so formal as to form a contract for the provision of this service. The contrast is to a previous example, that of public transport. There are no tickets, conditions or terms of agreement and no business or profit making organization is involved. There can be no obligation upon people in this scenario to ensure that transport is always made available to the party that pays. What would happen when the owner of the vehicle went on holiday or there was a shift change? In these circumstances an element of common sense must come into play. Most people will make informal agreements ranging from car pooling to picking up children from school or even being the designated driver on a night out. None of these create a contract as the intention is one of informal assistance or a mutual benefit, not to create legal relations.

Olley v. Marlborough Court Ltd (1949) 1 K.B. 532

Mr. Olley visited the hotel belonging to the defendant. He had not made an in advance booking and upon arrival requested a room for the night. He signed the register and there was no mention at that stage of any other terms or conditions that might impact upon his stay at the hotel. During the course of his stay Mr. Olley discovered that someone had broken into his room and stolen certain property including a fur coat. It subsequently became known that the defendant was negligent in relation to the security within the hotel. Nevertheless, the defendant sought to rely upon an exclusion clause that was placed in the bedroom the claimant stayed in. This stated that the hotel would not accept liability for lost or stolen items belonging to customers.

The question was whether the exclusion clause that was displayed in the bedroom constituted a valid term of the contract. It was not disputed that there were all the required components to for the agreement i.e. offer, acceptance, consideration and intention, but that was not to say that all the terms the hotel sought to rely upon could actually be enforced against Mr. Olley. As we mentioned above, terms must be brought to the attention of the customer, consumer or party against whom they are trying to be enforced at the moment the contract was entered into. Otherwise it would allow parties free will to include other terms at a later stage, albeit if the customer had known of such a term they might have decided not to enter into it in the first place.

The Court decided that the contract was entered into the moment Mr. Olley arrived at reception and signed the register. That was the point when the room was offered to him and he accepted. Intention was not an issue and in consideration of the agreement, he would receive a room to stay for which the hotel would receive payment. The fact that payment would usually come after the stay was irrelevant. Consequently Mr. Olley was not given notice of this exclusion clause until he had already entered into the contract and therefore it was unenforceable against him.

Similar examples of this issue of notice and timing of the terms of any contract can be seen where clothes are purchased and notices attempting to exclude liability are put on the receipt. The example of public transport above and the terms and condition relating to the travel must be stipulated at the relevant time. It should be pointed out here however that the actual notice of these terms need not be something that is brought to someone’s attention every time they enter into a contract. If there is a course of dealing or repeated business, and in a previous transaction a term was brought to the attention of the customer, then they could be held to have been made aware of it and it becomes a term of the contract. If Mr. Olley had stayed at the hotel on a number of previous occasions, it would have been difficult for him to argue that he had no knowledge of the exclusion term. In such circumstances it is arguable that he would have been deemed to have had knowledge and the hotel could have relied upon the term within the contract.

Adams v. Lindsell (1818) 1 B. & Ald. 681

This case concerns the acceptance of an offer and the importance of how that acceptance is communicated to the offeror. Here the defendant offered to sell the claimant fleeces of wool for a certain price. They requested that the response be made by post. This letter was misdirected by the defendant so that it was not received for 3 days after it was sent. The claimant decided to accept the offer and responded on the same day. This was posted on the 5th September but not received until the 9th September. However the defendant decided on the 8th September that as they had not received a response decided to sell the wool to someone else. The claimant argued that a contract had been created as he had accepted their offer.

The Court confirmed that the delays were entirely the fault of the offeror. Had the letter been posted correctly then this scenario would in all likelihood not have arisen. Furthermore the contract was created on the 5th September when the acceptance was posted, not when it was received. While the agreement was not communicated to the offeror, it could not prevent the contract being created. To decide otherwise would be to prevent contracts being created by post completely. It would otherwise require (in this scenario) the claimant to wait until the defendant had received the offer and then written to him saying that the terms were agreed and so on. This system of acceptance was thereafter referred to as the “postal rule”.

In contrast the offer itself can only be communicated to the offeree via the post once it has been received. Any pre-emptive negotiations or discussions are likely to amount to nothing more than an invitation to treat pending the formal offer.

While there has naturally been some development in this area, the most obvious issues arise with the creation of the internet and on-line shopping. The majority of people with access to the internet have purchased something at one time or another. The question as to the formation of any contract here is when does that contract arise? While it is not important to examine the legislation and case law in that particular area (which is vast) what is crucial is how this example of a seemingly antiquated rule can be adopted into a new and totally unforeseeable system through the medium of contract law. While the rule itself remains applicable to postal orders via catalogues and other postal services, the evolution does not stop and wait for something completely new to take its place. The law of contract in this area requires modification and adaptation to meet the demand of e-commerce and a society moving towards carrying out the majority of household and social affairs through the internet. Protection for the unwary or even experienced surfer of the web, when entering into contracts on-line is clearly an important function of modern contract law.

Conclusion

We have seen how contract law permeates every section of our lives. From employment, to conveyancing or even to social and recreational activities such as buying a drink in the pub, contracts are created all around us. While the majority are short lived and the terms fairly simple and unobtrusive, breaches of such agreements may still be enforced with all the force of the law as with the more serious forms of contract.

The public perception of contracts is often misleading as many have not found it necessary to enforce such terms. As we live in a capitalist society with freedom of choice, the need to ensure quality often negates the need for a consumer to enforce their rights as to quality and fitness under a contract of sale. Standards are maintained by Government bodies and independent organizations i.e. BSI. The consumer rarely has the need to enforce breaches of contract, and even if they do, retailers are so aware of the rights of consumers that they will allow an exchange of goods without question. It is more often that not (certainly in the current financial climate) that the terms as to payment are enforced by suppliers and sellers in default of the agreement more frequently. Issues of credit are widespread at the moment and the contracts that regulate the borrowing of money against property (hire purchase) or simply under a general agreement (credit card) are being breached every day. This is the other side of the coin for contract law. There are terms and conditions for both parties. This is the essence of a legal contract, the exchange of consideration without which there is nothing more than an unenforceable promise.

The law of contract needs to change with the developments in economics, technology and social attitudes. It is usually a matter for Parliament to intervene and legislate for new situations and introduce law that will govern particular relationships and the contract that arise between them. It is impossible however to legislate for all potential eventualities as a situation may arise that was not foreseen, or the technology, issue or relationship that it was intended to regulate may have moved on. It is then for the Courts to interpret the law so as to find the solution to any dispute. This is how contract law was in 1818 with the case of Adams v. Lindsell and how it will probably remain for the foreseeable future. While the variety and scope of contracts continue to evolve and increase, the general principles that we have examined above remain applicable. It may be that in years to come there will be introduced a system that will create a standard form of agreement based upon the nature and relationship of the parties to it e.g. companies or businesses in the same market dealing between themselves but there will always be the isolated agreement, or informal shake of hands that ultimately creates a contract and the enforceable terms it grants to those party to it.

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