What is Discharge of Contract?

Discharge of contract refers to the ending of a contractual agreement between parties. 

Entering into a contract creates legally binding rights and obligations for all parties to it, and by discharging the contract, those rights and obligations are no longer enforceable. This can either be because the terms of the contract have been fulfilled, or because the parties agree to end the contract. 

Where there is a refusal or inability to carry out the obligations by one or more parties, this will also terminate a contract. 

There are also statutory consumer rights that will allow a consumer to discharge the contract within a specific timeframe. 

Depending on how the contract is discharged, there can be additional legal and financial consequences. 

Failure to fulfil your obligations within a contract correctly can result in lengthy and costly legal disputes. It is critical therefore to ensure that you have discharged the contract appropriately to avoid any further liability. 

Discharge of Contract by Performance 

Discharging a contract by performance means the contract is satisfied by all parties carrying out the terms agreed within the contract. Performance is the preferred way of discharging a contract; however, disputes can arise regarding what constitutes ‘performance’. 

What is Performance? 

The general rule is that the parties to the contract must perform all the terms precisely in order for them to discharge their obligations. 

There may be circumstances, however, where this doesn’t occur, yet a court would still find that performance has been carried out sufficiently to discharge the parties’ obligations. This can include situations such as where the terms of the contract consist of separate agreements that can be completed in isolation from each other. 

Performance may also be seen as completed where one party voluntarily accepts partial performance of an obligation, and also where one party prevents the other from carrying out their duties. 

Partial performance may also be accepted where there has been substantial performance of the terms, which means that the party has almost completed their entire contractual obligation. However, this is a complex area and what is considered substantial is again a matter for the courts. 

For example in Re Moore & Landauer (1921), tins of fruit were contracted to be delivered in cases of 30 tins but were instead provided in cases of 24. The court held that substantial performance hadn’t occurred even though the number of tins that had to be delivered in total was the same. 

Discharge of Contract by Agreement 

It is also possible to discharge a contract by all parties agreeing to extinguish the rights and duties created by the contract. You can do this where parties still have rights existing in the contract (a ‘bilateral discharge’), or where only one party has rights remaining (a ‘unilateral discharge’). You can discharge a contract by agreement in situations where you want to: 

  • end the contract (usually for some other compensation);
  • terminate the current contract and substitute it with a new one; 
  • vary the original terms; or 
  • for one of the parties to waive their right for the other to perform.

As the agreement is essentially a new contract between the parties, all agreements must be made by deed or all the necessary elements of a contract must be present to make the agreement binding. 

How do I discharge a contract by agreement? 

Various legal steps need to be taken in order to discharge a contract by agreement; particularly where the purpose is to vary or substitute terms. It is important therefore to seek legal advice before entering into any new or additional agreements. 

Discharge of contract by frustration 

Frustration of a contract occurs where, due to circumstances not considered at the time of the contract, the terms of the contract become impossible to perform, or the commercial purpose of the contract is no longer viable. 

Examples of frustration include: 

  • Where, after the formation of the contract, the agreed actions of the parties become illegal
  • Destruction of an object essential to performing the contract
  • Incapacity of one of the parties (in a contract of personal service)
  • Where a specified event vital to the contract doesn’t occur (there may be issues where there is more than one event)
  • Government interference, such as in times of national emergency or war
  • Unforeseen and excessive delays 

The doctrine of frustration covers a wide range of circumstances which may end the obligations of the parties. However, its application is very narrow, and there are various elements the court will need to consider when looking at frustration, such as how long a delay must be before it is said to be frustrating and whether a specified event is deemed vital to the contract.  

Frustration will not apply in circumstances where: 

  • The change only incurs an increase in expense or loss of profit to either party 
  • There is an alternative way to perform the duties 
  • There is an express provision within the contract that deals with frustration 
  • The frustrating event is self-induced 

Relying on frustration to discharge contractual obligations can be complicated and difficult to enforce as it is only applicable in very narrow circumstances. However, in cases where frustration is appropriate, there are various remedies available.

The Law Reform (Frustrated Contracts) Act 1943 provides guidelines to ascertain losses arising from frustration. Specifically:

  • Any money paid before the frustrating event can be recovered 
  • Any money due after the event is no longer payable 
  • Expenses incurred before the frustrating event can be recovered as long as they don’t exceed what would have been payable to you by the contract before frustration
  • Where a party has obtained a valuable benefit from the contract (other than money) before the frustrating event, the court may order that party to pay a sum for receiving that benefit. 

Each of these remedies can be applied in conjunction with one another, therefore you can recover any money and expenses already paid and you will not need to pay anything further. You may also be entitled to a sum where the other party has obtained a valuable benefit. 

Even where frustration can be used as a way of discharging the contract, various complexities need to be addressed relating to money owed, expenses incurred and disputes regarding other benefits. Speaking to a qualified solicitor will provide you with the best advice on how to proceed. 

Discharge of contract by breach 

Discharging a contract by breach occurs where one of the parties either fails to perform their obligations (‘actual breach’) or by implying that they intend not to fulfil their duties when the time comes to perform them (‘anticipatory breach’). 

What is an actual breach?

An actual breach occurs where there is a failure by one of the parties to perform the terms of the contract. This can be one or more of the terms depending on the seriousness of the breach. 

What is an anticipatory breach? 

An anticipatory breach arises where a party indicates prior to the performance of the terms of the contract becoming due, that they do not intend to carry out their contractual obligations.

What happens if a party breaches a contract? 

If there has been an actual breach, there are various remedies available for the non-breaching party, including damages and injunctions. Anticipatory breaches are more complicated. 

For an anticipatory breach, the non-breaching party doesn’t need to wait until the date that the performance was due to start, and can commence action immediately. There are specific rules surrounding acceptance of the breaching party’s intention that need to be fulfilled before action can be initiated. 

In certain circumstances, an anticipatory breach also gives the non-breaching party the option to affirm the contract and demand that the breaching party perform on the due date.

If you think your contract may be subject to an anticipatory or actual breach, you should seek legal advice as soon as possible.  

When should I seek legal advice? 

The rules surrounding discharge of contract are complex, therefore whether you feel that another party to a contract is not fulfilling their obligations, or whether you would like to vary the terms of an existing contract, it is essential to seek professional legal advice from a qualified solicitor.

What is Consideration in Contract Law?

Consideration is one of three key elements required to make a contract valid and binding. The three essential components which must be present to make a contract enforceable are:

  • that an agreement has been reached between all parties;
  • that there is an intention by all parties to be legally bound by the agreement, and 
  • that all parties have provided valuable consideration. 

Consideration covers the ‘bargain’ element of a contract and is based on an exchange of promises. Both parties should provide something of value in return for something else, becoming both a promisor and a promisee. Effectively, each party must receive a benefit and suffer a detriment. 

Currie v Misa (1875) is the key case that defined consideration as “… some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other”. 

It’s also important for consideration to be something of value in the eyes of the law (Thomas v Thomas [1842]) – promises of love and gifts are excluded. 

For example, Andrea (the promisor) promises to walk Nik’s (the promisee) dog every Tuesday. Andrea’s promise will only be enforceable by Nik as a contract if he has provided consideration. Consideration would usually take the form of a payment of money, but could consist of some other service, such as Nik feeding her chickens once a week. 

What amounts to consideration? 

There are two types of consideration: executed and executory.

Executed consideration is where consideration has already been carried out. 

For example, Louise promises to donate £50 to charity if Angharad runs a marathon. When Angharad completes the marathon, the consideration is executed. 

The other type of consideration, executory, occurs where there is an exchange of promises to perform acts in the future.

For example, Pete promises to deliver a mattress to Amy at a future date, and Amy promises to pay for the mattress on delivery. If Pete fails to deliver the mattress in the future, there is a breach of contract and Amy can sue. If Pete delivers the mattress, his consideration then becomes executed. 

A number of the rules govern consideration:

  1. Consideration must not be past 

Consideration cannot be something that has happened in the past. 

The case of Roscorla v Thomas (1842) illustrates that past conduct is not sufficient. An agreement to purchase a horse had been completed between a buyer and a seller. Upon completion of the contract, the seller promised that the horse was “free from vice”. But, the buyer soon discovered that the horse was vicious and so the buyer sued for breach of promise. 

The court held that the buyer’s claim must fail because the promise was made after the sale and was unsupported by consideration. 

  1. Consideration must be sufficient, but need not be adequate

While some value must be given to a promise for it have contractual force, the consideration doesn’t need to be adequate. 

Usually, a court will not look into whether adequate value has been given as the courts do not normally interfere with the bargain struck between the parties.

For example, Pat agrees to give James an antique lamp worth £400 in exchange for a picture painted by James (which has little value). While the painting may be worth much less than the lamp, there has been sufficient consideration even if it’s not adequate. 

Sufficient also means that the promise must not be illusory, i.e. have no substance. 

For example, Carol cannot promise to buy Elliot’s car in return for ‘whatever Carol feels like paying’. This type of consideration is discretionary and illusory. 

  1. Consideration must move from the promisee

You’ll need to show that you’ve provided consideration if you want to enforce the contract. A third party providing consideration is not enough.

For example, If Rachel promises to pay Kirsty £100 if Andrew will clean the oven and Andrew does so, Kirsty won’t be able to enforce Rachel’s promise (unless Kirsty had procured Andrew to clean the oven). 

In some cases, a third party may be able to enforce rights created in her favour by a contract which she was not a party to, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met.

It’s important to note that while consideration must move from the promisee, it doesn’t have to move to the promisor.

For example, Ashley promises to pay Marc for the wedding cake provided by Marc’s wife.

4. Forbearance to sue

Promising not to sue can also be good consideration. This can occur where one person has a valid claim against another but promises to forbear from enforcing it.

For example, Aislinn destroys Aaron’s bike in an accident. Aaron contracts with Aislinn that he will not sue for property damage, in exchange for Aislinn giving Aaron her bike. 

5. Existing duties

Legal or contractual duties that you are already required to perform can’t be used as consideration for a new contract. 

For example, if someone is under a public duty to undertake a particular task, this is not sufficient consideration for a contract. 

In Collins v Godefroy (1831), Godefroy promised to pay Collins for providing evidence. However, the court held that Collins couldn’t enforce the promise as he was under a statutory duty to give evidence. 

But, if the promisee provides more than what his public duty imposes on him, this is good consideration. 

In Glasbrook v Glamorgan (1925), Glasbrook asked the police to help at a mining site because of fears of a conflict between protestors and miners. 

The local authority of Glamorgan then presented Glasbrook with a bill for their services. Glasbrook refused to pay for their services because, according to Glasbrook, it was the duty of the police to carry out these services. 

But the court held that Glasbrook had to pay for the services because he had requested them, and these services were seen as not within the duty of the police. 

Is consideration required for all contracts?

Consideration is one of the three vital elements needed to create a valid contract, so the only way to avoid the requirement is by using a formal contract such as a deed. 

A deed must be used if you want to transfer property or land and it sets out the rights promised by the contract. Because it is a complex document, the deed will need to be produced by a solicitor. 

Traditionally, deeds had to be ‘signed, sealed and delivered’. But now, this means that the document must be signed and attested by independent witnesses. 

What is promissory estoppel?

In some circumstances, the long-standing equitable doctrine of promissory estoppel can come into play, preventing someone from undertaking an act that they would usually be entitled to do under the contract.

This can occur where someone says something or does something which induces another person to act to their detriment. 

The person who has acted to their detriment can make a claim of promissory estoppel at the court. To be successful, they must show that an assurance was made and the assurance was relied upon to their detriment. Essentially, they must show that it would be unconscionable or unfair for the promisor to go back on their promise. 

The court will take into account the degree of detriment suffered by the person making the claim and it has discretion in what relief to offer to the claimant. 

Why take legal advice? 

If you are looking to draft or negotiate a contract, or are facing a contract dispute, it’s vitally important that you seek out the advice of an experienced solicitor who can identify issues relating to contract fundamentals such as consideration, and will ensure that your rights are protected under the contract. A solicitor will also make sure that the contract is valid and enforceable and avoid any issues relating to estoppel. 

What is an Exclusion Clause in Contract Law

In a business-to-business context, a common way of apportioning risk is for the parties to exclude or restrict their liability to one another in the event of default. Some clauses seek to completely exclude liability, whereas others limit it. This may be, for example, by capping the amount payable in damages in the event of a breach, or by restricting the types of loss recoverable or the remedies available.

Understanding how to incorporate enforceable exclusion and limitation of liability clauses can be crucial when negotiating or drafting such clauses, so as to adequately balance the rights and obligations of both parties. 

This article examines the question of ‘what are exclusion clauses?’ – providing a brief overview of some of the main legal principles involved. However, before entering into any business-to-business contract, expert legal advice should always be sought.

What are exclusion clauses and when are they not permitted?

An exclusion clause is a contractual term that excludes or limits liability, the latter often being referred to as a limitation of liability clause.

It is not possible, however, for the parties to simply exclude or limit liability in any way they chose, not least in an unreasonable way. Exclusion and limitation of liability clauses are subject to both statutory and common law controls. 

In particular, the Unfair Contract Terms Act 1977 regulates the exclusion and limitation of liability in both negligence and for breach of contractual obligations. Under the 1977 Act, liability can never be excluded or limited for the following:

  • death or personal injury caused by negligence.
  • implied terms as to title and quiet possession under the Sale of Goods Act 1979, the Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services Act 1982.

For public policy reasons, it is also not possible for a party to exclude or limit liability for its own fraud, either in inducing the other party to enter into the contract through fraudulent misrepresentation or during the course of it.

What are exclusion clauses and when are they permitted?

For business-to-business contracts, the following types of liability can be excluded or limited by way of specific contractual provision:

  • loss or damage other than death or personal injury resulting from negligence. Where a contract term purports to exclude or limit liability for negligence, a person’s agreement to or awareness of it is not of itself to be taken as indicating his or her voluntary acceptance of any risk.
  • implied terms as to conformity of goods with description or sample, or relating to their quality or fitness for a particular purpose under the 1979 and 1973 Acts. This covers both sale of goods and hire-purchase.
  • in contracts where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods or hire-purchase, implied terms as to conformity of goods with description or sample, or relating to their quality or fitness for purpose. This primarily covers corresponding terms implied under the 1982 Act relating to contracts for services where goods are also supplied.
  • liability by reason of pre-contractual misrepresentation or any exclusion of any remedy available by reason of such a misrepresentation, other than for fraudulent misrepresentation.
  • where one of the parties is a business contracting on the other’s written standard terms, the other cannot exclude or restrict liability for breach of contract, nor claims to permit a contractual performance substantially different from what is expected, or claims to allow no performance at all.

This list is by no means exhaustive, rather it provides statutory examples of when exclusion clauses are expressly permitted, albeit only to the extent that the term satisfies the requirement of reasonableness.

What are exclusion clauses and what is the requirement of reasonableness?

Any exclusion or limitation of liability clause will be subject to a requirement of reasonableness. It is for those claiming that a contract term satisfies this requirement to show that it does. The test of “reasonableness” is set out under section 11 of the 1977 Act. This provides that:

“the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”.

In assessing reasonableness, regard should be had to the following guidelines set out under Schedule 2 of the 1977 Act:

  • the strength of the bargaining positions of the parties relative to each other, taking into account, among other things, alternative means by which the customer’s requirements could have been met.
  • whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term.
  • whether the customer knew or ought reasonably to have known of the existence and the extent of the term, having regard, among other things, to any custom of the trade and any previous course of dealing between the parties.
  • where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable.
  • whether the goods were manufactured, processed or adapted to the special order of the customer.

In addition, where a term of a contract seeks to limits liability to a specified sum of money, the cost and availability of insurance may be relevant in an assessment of reasonableness.

Although the 1977 Act provides that these guidelines apply specifically to contracts involving the sale and supply of goods, they are usually treated as having more general application. Further, these statutory guidelines are not exhaustive.

What are exclusion clauses and what are the effects of falling foul of the reasonableness test?

If an exclusion or limitation clause falls foul of the statutory provisions under the 1977 Act, either because it purports to exclude a type of liability which cannot be excluded, or because it falls foul of the requirement of reasonableness, it will be ineffective. The court will not rewrite the clause to substitute an alternative, rather liability will become completely uncapped, subject to the usual rules relating to the recovery and assessment of damages.

The risk of an entire exclusion or limitation of liability clause being unenforceable can be minimised by drafting it, using sub-clauses, as a series of separate terms easily distinguishable from one another. 

In business-to-business contracts, clauses are far more likely to be enforceable, and be construed less strictly, if they limit liability rather than exclude it entirely. However, as the wording of exclusion clauses tends to vary so much, many cases turn on their specific facts.

What are exclusion clauses and when are they outside the control of the Unfair Contract Terms Act 1977?

There are in fact a number of contracts to which the 1977 Act, and therefore the test of reasonableness, does not apply. Broadly speaking, these include:

  • international supply contracts
  • contracts of insurance
  • contracts relating to interest in intellectual property rights
  • contracts relating to interests of land
  • contracts of employment, except in favour of the employee
  • contracts relating to the formation, dissolution or constitution of a company or to the rights or obligations of its members.

In circumstances where the provisions of the 1977 Act do not apply then, subject to common law and any industry-specific rules, the parties are free to draft whatever exclusion or limitation they may agree. 

Legal advice in relation to the question ‘What are exclusion clauses?’

Exclusion and limitation of liability clauses are a sensible way of allocating risk but need careful and expert drafting if they are to be enforceable. 

In the event that such clauses are not properly incorporated into the contract, are excluded by statute or at common law, or fall foul of the reasonableness test, they will be ineffective. Accordingly, the liability which the clause purported to exclude or limit will become completely uncapped.  In these circumstances, the financial and other consequences for you and your business could be significant. 

By seeking legal advice prior to entering into a contract, your legal adviser can help you with the following matters during the negotiation and drafting process:

  • incorporating the clause into the contract
  • ensuring that the liability in question is covered by the clause
  • identifying any cases or legislation regulating its effect
  • applying the requirement of reasonableness

By fully understanding ‘what are exclusion clauses?’ you can agree on a contract that adequately balances the rights and obligations of both parties.

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

What is Mistake in Contract Law?

This article examines the meaning and effect of the doctrine of mistake in contract law, including the different types of mistake, how these may impact on the validity of a contract and the legal remedies available for ‘mistake contracts’. 

What is a ‘mistake contract’?

Mistake is a legal concept in contract law. It refers to an erroneous belief held by one or both parties to a contract at the time the agreement is entered into. A contract entered into under a mistake (or a ‘mistake contract’) may arise in various different ways including:

  • a mistake as to the subject matter or nature of the transaction.
  • a mistake as to the terms of the contract.
  • a mistake as to the identity of the person with whom the contract is entered into.

Mistake should not be confused with misrepresentation. A misrepresentation is a false statement of fact made by one party to another – whether innocent, negligent or fraudulent – which, whilst not being a term of the contract, induces the other party to enter the contract.

The effect of an actionable misrepresentation is to render the contract voidable, giving the aggrieved party the right to rescind the contract or to have it set aside by the court. A mistake, on the other hand, can potentially render a contract void or voidable. A void contract is one that is declared a nullity, such that it is wholly lacking in legal effect and no rights or obligations can be derived under it.

Types of ‘mistake contracts’

English law recognises three different types of mistake:

  • common mistake – both parties make the same mistake.
  • mutual mistake – the parties are at cross-purposes with each other.
  • unilateral mistake – only one party makes the mistake.

Common mistake contract

A common mistake occurs where the parties entered into a contract operating under a shared misapprehension or misguided belief as to a matter of existing fact or law.  A common mistake that goes to the very root of the contract will potentially render the contract void.

The court must be satisfied that the mistake is so fundamental, such that performance under the contract is either impossible, or performance is essentially different from that which the parties anticipated.

In particular, a contract will be void at common law where the subject matter of the contract no longer exists, for example, a contract for the sale of goods where those goods have already perished. Similarly, the contract will be void if the buyer makes a contract to buy something that in fact already belongs to him.

A contract will not generally be void for mistake if it relates to the quality of the subject matter, as this is unlikely to render performance fundamentally different to that originally agreed. 

Mutual mistake contract

A mutual mistake is one where the parties are at cross-purposes. In other words, it is a misunderstanding between the parties entering into a contract as to a material fact. 

A mutual mistake will only affect the validity of the contract if the mistake is so fundamental that it nullifies consent. If the mistake goes to the heart of the contract, the contract will be rendered void. 

The courts will apply an objective test to see if the contract can be saved, ie; what would a reasonable person have understood the contract to mean. If, in light of the parties’ words and conduct, there is only one possible interpretation of what was agreed, the contract will still be valid. If, on the other hand, a reasonable person could not determine the meaning then the contract will be held void for mistake.

Unilateral mistake contract

A unilateral mistake occurs where only one party is mistaken. This includes a mistake relating to the terms of the contract or mistake as to the identity of the person with whom the contract is entered into.

Whilst only one party must be mistaken about the terms of the contract, the other party must know or ought to have known of the mistake to invalidate the contract. The courts will apply a subjective test, ie; from the point of view of the mistaken party’s intention in entering into the contract.

Mistakes as to identity are generally induced by fraud in that one of the parties is claiming to be someone who they are not. As such, there is an overlap here with the law of misrepresentation and whether a contract is rendered void or voidable.

This distinction is particularly significant in the context of third party rights. By way of example, where goods have been acquired under a contract and sold on to a third party acting in good faith, the mistaken party can seek to recover the goods from the innocent third party if the contract is void. If, on the other hand, the contract is voidable, the purchaser will acquire good title.

Effects of a ‘mistake contract’

Only those mistakes that operate to negative consent will render a contract void. A ‘mistake contract’ that is void must be distinguished from one that is merely voidable. A contract that is void produces no legal relationship between the parties and has no legal effect. The contract is said to be void ab initio, ie; from the beginning, as if the contract was never made.

This means that neither party is able to sue the other on the contract, and any payments made or property transferred under the contract are recoverable since neither party has any entitlement to what he has received. Alternatively, if the contract is voidable, the contract will have been valid from the start and obligations may arise under it despite the mistake.

A voidable contract is one that a party is entitled to rescind or to have set aside by the court. However, until the mistaken party exercises its right to rescind, the contract remains valid and legally binding. Rescission has the effect of cancelling the contract and restoring the parties, so far as possible, to their pre-contractual position.

Remedies for a ‘mistake contract’

If argued successfully, mistake can lead to an agreement being found either void or voidable by the courts. If a contract is found to be void, where appropriate the court will order restitution, ie; recovery of any monies paid or property transferred by mistake. In circumstances where a contract is found to be voidable, the court may look to any one the following equitable remedies:

  • rescission – this is where the contract is set aside and the parties are returned to the position in which they were before the contract was made. 
  • specific performance – this is where the court can compel a party to perform its contractual obligations.
  • rectification – this is where the court can correct an error of expression where a written document does not accord with what was agreed orally. 

For an in-depth look at mistake contracts 

The law relating to mistake contracts can be highly complex. This article provides only an overview of some of the legal principles involved in the law relating to mistake. For more detailed guidance on this topic, students should refer to specific texts or analysis on the subject, with reference to all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

Offer and Acceptance

The formation of a contract is primarily based upon the existence of an agreement between the parties. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. This article examines the legal concepts of offer and acceptance in contract law, and how these principles work together to help create a legally enforceable agreement.

Formation of a contract 

A contract is an agreement that gives rise to rights and obligations enforceable by law. One of the first issues to consider when a contractual dispute arises is often whether or not there is a valid contract capable of being enforced. 

A valid contract is made up of the following essential ingredients: offer, acceptance, consideration and contractual intention. The concept of contractual intention refers to the intention of the parties to create legal relations, ie; to enter into a binding agreement, whereas consideration refers to the price that one party pays for the promise of the other.

For the formation of a contract, however, there must first be offer and acceptance, such that the parties can be said to have reached a legally binding agreement. So what exactly constitutes an offer capable of acceptance?

Offer contract law

In contract law, an offer is an expression of willingness to contract on a specified set of terms. An offer may be made expressly, either orally or in writing, or by conduct. It can be addressed to a single person, to a specified group of persons or to the world at large. 

An offer is essentially a proposal made with the intention that, if accepted by the person to whom it is addressed (the offeree), the person making the offer (the offeror) intends to be contractually bound by it.

Whether the offer is made with the requisite intention is assessed objectively. Accordingly, the offeror will be bound if his words or conduct are such as to induce a reasonable person to believe that he intends to be bound, even if in fact he has no such intention.

Distinguishing an offer from an invitation to treat

It is important here to draw a distinction between an offer and an invitation to treat, the latter being a communication by which a party is itself invited to make an offer and is not intended to be contractually binding.

The distinction between an offer and an invitation to treat depends primarily on the intention of the party making the statement. Accordingly, a statement will not be an offer if it makes clear that the offeror is not bound by the offeree’s acceptance. Common examples of invitations to treat include advertisements or displays of goods that customers can select in a self-service context.

 In the well known case of Carlill v Carbolic Smoke Ball Company (1893) the defendant company advertised that if its’ carbolic smoke ball failed to cure influenza, buyers would receive a reward of £100.

When sued by Mrs Carlill, the Smoke Ball Company argued that the advert was not to be construed as a legally binding offer, it was merely an invitation to treat or rather, a mere puff lacking true intent.

The Court of Appeal held that the advertisement was in fact an offer, where an intention to be bound could be inferred from the adverts own claim to sincerity in which it stated that £1,000 had been deposited in the company’s bank account.

How offers can be withdrawn

The general rule is that an offer can be withdrawn at any time before it is accepted. To be effective in law, the offeree must be informed that the offer no longer stands, although such communication need not come from the offeror, but rather can be made by a reliable third party. 

An offer may also come to an end through lapse of time or the occurrence of a condition. With lapse of time cases, where no timeframe is specified for the acceptance of an offer, the offer will remain open for a reasonable period. What constitutes a reasonable period depends on all the circumstances. If, on the other hand, the offer stipulates a time limit within which acceptance must occur, the offer will cease to be open for acceptance once that time limit has expired.

If an offer expressly provides that it is to determine on the happening of a prescribed condition or particular event, it cannot be accepted once that condition or event has been satisfied. Similarly, an offer may be construed as being subject to an implied condition, for example, an offer made at auction ceases when a higher bid is made.

Acceptance contract law

A contract will only be capable of being enforced if an offer has been accepted and an agreement reached between the parties. In contract law, acceptance is an unqualified expression of agreement to all the terms set out in the offer.

A mere acknowledgement of receipt of the offer or a request for further information in relation to its terms, will not generally be sufficient to constitute acceptance.

The terms in which the offer is made and accepted must also correspond. Accordingly, if a response to an offer seeks to vary a term or introduce a new term, it will not constitute an acceptance, but rather a counter-offer. A counter-offer has the effect of extinguishing the original offer, which the original offeror can either accept or reject. 

How offers can be accepted

The general rule is that an acceptance has no legal effect until it is communicated in some way to the offeror. This means that the acceptance must be brought to the attention of the offeror. Acceptance can take effect by words or by conduct. 

An offer that prescribes the mode of acceptance can generally only be accepted in that way. That said, an offeror is not permitted to stipulate that silence amounts to acceptance. An offeree who does nothing in response to an offer is not generally bound by its terms, not least because it would be unfair to impose on an offeree the inconvenience of rejecting an offer they had no wish to accept.

The ‘postal rule’ stipulates that a postal acceptance takes effect when the letter of acceptance is posted. However, this rule only applies if it is reasonable to use the post, for example, if the offer itself was made by post.

The postal rule is one of convenience, in particular to govern a situation where an offer is withdrawn by post, but the letter communicating the withdrawal does not reach the offeree before the offer is accepted by post. In these circumstances, the offeree’s posted acceptance prevails. The rule also applies where acceptance is lost or delayed in the post. Save except where the loss or delay is attributable to the offeree’s own error which, for example, causes the acceptance to be misdirected, a posted acceptance is effective even if it never reaches the offeror.

For an in-depth look at offer and acceptance 

The law relating to offer and acceptance can be complex. This article provides only an overview of some of the legal principles involved. For detailed guidance on this topic, students should refer to specific texts or analysis on the subject, with reference to all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

Contract Terms

A contract is a legally enforceable agreement between two or more parties. The terms of contract set out the rights and obligations of each party under that agreement. It is these terms that determine what the contracting parties are legally obligated to do in exchange for the promise of the other.

The following article provides an overview of the fundamentals of the terms of contract, including express and implied terms, classification of the different types of terms and the effect of their breach.

Express terms of contract

The terms of contract may be express or implied. Express terms are those explicitly agreed between the parties, either orally or in writing.

Even though these terms are, by definition, those openly expressed at the time a contract is made, issues often arise as to what constitutes an express term, whether a term has been incorporated into a contract or interpreting the meaning of an express term:

  • contractual terms or representations – not all statements made by the parties during negotiations are intended to have contractual force. Some are only representations, meaning they are intended to induce the other party to enter into the contract, but not to be capable of imposing liability for breach of contract.
  • incorporation of express terms – where terms are contained within different documents, or where a contract is made subject to standard terms, it is important to ascertain whether the party relying on the terms and conditions had taken reasonable steps to bring these to the attention of the other party.
  • interpretation of express terms – once express terms have been identified, there is still the question of interpretation. Where parties disagree on the meaning of an incorporated term, it will be for the court to objectively construe the meaning of the term having regard to the words expressed, the contract as a whole and the factual matrix reasonably available or known to the parties at the time the contract was made.

Implied terms of contract

Implied terms are not expressly stated but rather arise by implication, often to reflect the intention of the parties at the time the contract was made or because the contract doesn’t make commercial sense without that term. These terms may be implied into a contract by fact, by operation of law or by custom and usage:

  • implied by fact – terms of contract implied by fact are ones that are not expressly set out in the contract but which the parties must have intended to include. Whether such a term is implied depends on the wording of the contract and the surrounding circumstances known to both parties at the time of the contract. In particular, a term can only be implied if the officious bystander would consider inclusion of the term to be so obvious as to go without saying or, alternatively, the term is necessary to give business efficacy to the contract.
  • implied by law – terms of contract may be implied by law even where such terms were not intended by the parties. These are terms that arise as a legal incident from the nature of the particular contractual relationship. For certain contracts the law seeks to impose a standardised set of terms as a form of regulation, for example, as between landlord and tenant or employer and employee. 
  • implied by custom or usage – terms of contract may be implied by custom or usage where there is clear and sufficient factual evidence that a custom operates within a particular trade or industry. However, the practice must be so well defined and recognised that contracting parties must be assumed to have had it in their minds when they contracted. Further, no such term will be implied if the term is unreasonable or if the contract evidences a contrary written intention of the parties.

Classification of the terms of contract

Contractual terms are often classified into one of three types: a condition, a warranty or an intermediate term (also referred to as an innominate term). These can be broadly defined as follows:

  • condition – this is an important and fundamental term going to the very heart of the contract. In other words, the term is so essential to the very nature of the contract that its’ non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all. A breach of a condition entitles the aggrieved party to terminate the contract and claim damages.
  • warranty –a warranty is a minor term, not critical to the performance of the contract, breach of which does not entitle the aggrieved party to terminate the contract, but does allow for a claim in damages.
  • intermediate term – this is a term that cannot be identified as amounting to either a condition or a warranty at the time of entering into the contract. Whether or not breach of an intermediate term will entitle the aggrieved party to terminate the contract will only be capable of being ascertained once the gravity of the breach has been considered. Here the court will look, in particular, to whether the aggrieved party was deprived of substantially the whole benefit of the contract. 

Since breach of a condition entitles the aggrieved party to terminate the contract and claim damages, contractual disputes can often centre on whether or not a particular term of the contract takes effect as a condition or a warranty.

Some conditions are implied by law, for example, under the Consumer Rights Act 2015, the supply goods is to be treated as including a condition that those goods are of satisfactory quality.  In other cases, the contract itself may seek to classify a term in a particular way. However, the labelling of a term does not necessarily resolve the issue as to how a term should be construed. This will be a matter of construction in each individual case.

Remedies for breach of the terms of contract 

Under the terms of contract, the remedies available for breach will, as previously discussed, depend upon the nature and extent of the breach. The most common contractual remedies include:

  • repudiation – if a condition of a contract is breached, the aggrieved party is entitled to terminate the contract and treat himself/herself as discharged from further performance under it. This is known as repudiation. The aggrieved party will also be able to claim damages. If a warranty is breached, the aggrieved party may claim damages but will not be able to repudiate the contract.
  • damages – this is compensation used to put the aggrieved party in the position they would have been had the contract been properly performed. Damages will only be recoverable for loss suffered as a result of the breach provided it is not too remote.  The aggrieved party is also under a duty to mitigate any loss.
  • specific performance – this is an alternative remedy for breach of contract in which the court can compel a party to perform its contractual obligations. Unlike damages, which are available as of right, specific performance is granted at the court’s discretion.

Discovering more about the terms of contract 

The law relating to terms of contract is complex. This article provides only an overview of some of the legal principles involved. For detailed guidance on terms of contract, students should refer to specific texts or critical analysis on the subject, with reference to any statutory provisions and all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

Contract Law

Contract law is a body of law regulating the making and enforcing of agreements. We all enter into hundreds of contracts throughout out lives, very often on a daily basis. This can range from simply buying a cup of coffee or booking a holiday, to entering into a contract of employment or selling our home.

This article provides an overview of the fundamentals of contract law, including how a contract is formed, what can invalidate a contract, as well as contractual terms, breach and legal remedies. 

What constitutes a legally enforceable agreement in contract law?

A contract is a legally enforceable agreement between two or more parties setting out their mutually binding obligations. There are several different types of contract, most typically associated with the sale of goods, the provision of services, or the exchange of interests and ownership.

A contract can be written or oral, or a combination of both, although by law some contracts must be in writing, for example, for the sale of land. 

To be legally enforceable, a contract must comprise of the following four essential elements:

  • Offer – an expression of willingness to contract on a specific set of terms. An offer is essentially a proposal made with the intention that, if accepted, the person making the offer intends to be contractually bound by it. It is important here to draw a distinction between an offer and an invitation to treat, the latter being simply an invitation to make an offer that is not intended to be contractually binding. An offer can be revoked at any time before it is accepted, so long as you inform the person you made the offer to that the offer no longer stands.
  • Acceptance – this is an expression of agreement to all the terms set out in the offer.  An offer must be accepted in accordance with its precise terms if it is to form an agreement. Communication of acceptance that seeks to vary the terms of an offer will be construed as a counter-offer.  A counter-offer extinguishes the original offer that the original offeror can either accept or reject.
  • Consideration – for a contract to be binding, the parties must exchange something of value. Consideration is essentially the price that one party pays for the promise of the other. The price is often money, but it can be anything that has value, even something intangible such as a promise to do or not to do something. Although a promise has no contractual force unless some value has been given for it, consideration need not be adequate. Accordingly, nominal consideration is sufficient.
  • Intention to create legal relations – this refers to the intention of the parties to enter into a legally enforceable agreement. Whether two parties have intention to enter into a binding agreement will depend on the particular circumstances. The law generally draws a distinction between commercial agreements, where the assumption is that the parties intend to be legally bound, and social or domestic agreements, where the parties may be under a moral but not legal duty to honour any agreement. Needless to say, these presumptions can always be rebutted in court by producing evidence to the contrary.

To be legally binding, all parties must also have the legal capacity to enter into a contract, ie; the ability to understand its terms and their contractual obligations under it. In contract law, special provision is made here for minors and those under a mental disability. 

Can an agreement be invalidated in contract law?

Assuming all essential elements of a valid contract are present, there are also various other factors that may affect the validity of a contract once formed. While certain vitiating factors will render a contract void, others will render the contract merely voidable. 

A void contract is one that is declared a nullity, such that it is wholly lacking in legal effect and no rights can be derived under it. A voidable contract is where the contract is still legally binding but allows a party to ask the court to rescind the contract, ie; set it aside, and seek restitution of any monies paid under it.

The four main vitiating factors in contract law are as follows:

  • Mistake – a common mistake is one shared by both parties, whereas a mutual mistake occurs when the parties to a contract are at cross-purposes. A unilateral mistake is where one party is mistaken but the other knows or ought to have known of the mistake. If the mistake is fundamental to the nature of the contract, this may result in the contract being rendered void.
  • Misrepresentation – misrepresentation is defined as the false statement of material facts that induces the creation of a contract. This may include innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation. The effect of an actionable misrepresentation is to render the contract voidable.
  • Duress – this is where a party has been forced or coerced into a contract. Duress can take many forms including threats of violence, threats to property, unlawful restraint or even economic duress. Subject to the nature and degree of the coercion used, this may either render a contract void or voidable.
  • Undue Influence – this is where a contract has been entered into as a result of pressure that falls short of amounting to duress. It operates where there exists a relationship between the parties that has been exploited by one party to gain an unfair advantage over another. Undue influence will render a contract voidable.

Further, where the purpose of an agreement is to achieve an illegal end, the contract cannot be enforced for illegality. However, the courts will differentiate between those contracts that are said to be illegal at their formation, and those that are subsequently performed in an illegal manner. 

What are the terms of an agreement and how are they defined under contract law?

The terms of the contract will set out the rights and obligations of each party. These terms may be express or implied. 

Express terms are those explicitly agreed between the parties, either orally or in writing. Implied terms are those implied by law or inferred through the conduct of the parties. The law may also imply a term into a contract if it is deemed necessary for the purposes of business efficacy or in accordance with normal practice and custom.

A contract will comprise of conditions and warranties, or in some cases what may be regarded as innominate terms. A condition is an important and fundamental term of the contract going to its’ root, whereas a warranty is a minor term and not central to the existence of the contract.

An innominate term is an intermediate term that cannot be defined as either a condition or a warranty, but rather the court will look to whether the aggrieved party was deprived of substantially the whole benefit of the contract in the event of breach of that term.

What constitutes a breach of an agreement under contract law?

The terms of the contract will dictate how the contract is to be performed. Performance that falls short of what is required under those terms will constitute a breach of contract. A breach can occur where, for example, a party refuses to perform their duties, their performance is substandard or they fail to perform their duties within a reasonable timeframe.

If a breach is serious or fundamental to the contract, this will be treated as a breach of condition. If the breach is minor and not critical to the performance of the contract, this will be treated as a breach of warranty. 

What remedies are available for breach of an agreement under contract law?

Under contract law, the remedies available for breach of contract will depend upon the nature and extent of the breach, but include:

  • Repudiation – if a condition of a contract is breached, the aggrieved party is entitled to repudiate, ie; bring the contract to an end and claim damages. If a warranty is breached, the aggrieved party may claim damages but will not be able to repudiate the contract.
  • Damages – this is compensation used to put the aggrieved party in the position they would have been had the contract been properly performed. Damages will only be recoverable for loss suffered as a result of the breach provided it is not too remote.  The aggrieved party is also under a duty to mitigate any loss.
  • Specific performance – this is an alternative less common remedy for breach of contract in which the court can compel a party to perform its contractual obligations. Unlike damages, which are available as of right, specific performance is granted at the court’s discretion.

For an in-depth look at contract law 

Contract law is a highly complex area of law. This article provides only an overview of some of the legal principles involved. For detailed guidance on contract law, students should refer to specific texts or analysis on the subject, with reference to any statutory provisions and all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.