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.
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.