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English Law

A contract is an agreement enforceable in court. Contract law regulates every transaction, from buying a train ticket to computerised derivatives trading.

Introduction edit

Contract law is the branch of English law which deals with the regulation of contracts. As a general rule, any agreement between two or more parties that is enforceable in court is a contract. One of the most common types of contract is that between a shop and a customer, which is formed and executed at the point of sale, usually the shop till. Arrangements within a domestic setting, for example between a married couple or a parent and child are generally not viewed by the courts as enforceable contracts.

Courts will attempt to ensure that parties to a contract have genuinely consented to the deals that bind them, because a contract is a voluntary obligation which has been entered into freely.

In most cases, a contract is formed when one party makes an offer, and another party accepts it either by communicating their assent or performing the terms set out in the offer. If the terms of the contract are clear to the reasonable outside observer and the parties can be presumed from their behaviour to have intended that the terms are binding, generally the agreement is enforceable. This is an objective test, as opposed to a subjective test which looks at the actual intentions of the parties. English courts have preferred an objective test for reasons of clarity and predictability, so parties can have a good idea of when they will and will not be entering into enforceable legal relations.

There are however certain exceptions to this objective test, particularly in complex commercial transactions and cases where the courts are seeking to avoid a particularly unjust or unreasonable outcome.

In the common law there is no particular formal process or action (such as a document, signature or specific form of words) that signals where a contract has been formed. Courts will generally look at how the words and conduct of the parties appear to a reasonable observer to determine whether a contract is present and enforceable.

Some contracts though, particularly for large transactions such as insurance or the sale of land, also require certain formalities of signatures, witnesses and "consideration" (something of value), to a bargain as a precondition to enforce it. These formalities are often set out in statute.

Sources of contract law edit

Contract is an area of law that has mainly developed through case law. There is relatively little legislation governing this area. Some of the key statutory provisions include:

  • The Consumer Rights Act 2015
  • The Misrepresentation Act 1967
  • The Sale of Goods Act 1979

As you will see during this course, many statutes that govern contract law were passed either as a result of the UK's membership of the European Union, or in response to the evolution of the Common Law, which was going in a direction that Parliament found to be undesirable.

What can a contract do? edit

In principle, there is extensive freedom to agree on the contents of a deal. Terms in an agreement are incorporated through express promises, by reference to other terms or potentially through a course of dealing between two parties. Those terms are interpreted by the courts to seek out the true intention of the parties, from the perspective of an objective observer, in the context of their bargaining environment. Where there is a gap, courts typically imply terms to fill the spaces, but also through the 20th century both the Judiciary and Parliament have intervened more and more to strike out surprising and unfair terms, particularly in favour of consumers, employees or tenants with weaker bargaining power.

Contracts can be made personally or through an agent acting on behalf of a principal, if the agent acts within what a reasonable person would think they have the authority to do.

Contract law works best when an agreement is performed, and recourse to the courts is never needed because each party knows her rights and duties. However, where an unforeseen event renders an agreement very hard, or even impossible to perform, the courts typically will construe the parties to want to have released themselves from their obligations. It may also be that one party simply breaches a contract's terms. If a contract is not substantially performed, then the innocent party is entitled to cease performance and sue for damages to put them in the position as if the contract were performed.

How are contractual disputes settled? edit

A key point to reiterate is that when presented with a contractual dispute, courts will view the situation from the perspective of an objective observer. This means that contracts are usually interpreted from the perspective of a reasonable outside observer. If the words and behaviour of the parties indicate a certain intention, for example to be bound on specific terms, then the court will generally not take into account the subjective state of mind of the parties, even if they are to the contrary. There are exceptions to this rule, which will be covered later in this module, but it is important to remember this presumption when analysing contractual disputes.

In the event of a breach of contract, the party in breach is under a duty to mitigate losses caused by the breach. The party affected by the breach cannot claim for harm that was not a direct consequence of the contractual breach, also known as a remote consequence.

Damages can either place the wronged party in a contract in a position they would have been in had the breach not occurred, and more exceptionally in the position they would have been in had they not entered into the contract.

Remedies are based on the principle that full compensation for all losses, pecuniary or not, should be made good. In exceptional circumstances, the law goes further to require a wrongdoer to make restitution for their gains from breaching a contract, and may demand specific performance of the agreement rather than monetary compensation. It is also possible that a contract becomes voidable, because, depending on the specific type of contract, one party failed to make adequate disclosure or they made misrepresentations during negotiations.

Unconscionable agreements can be escaped where a person was under duress or undue influence or their vulnerability was being exploited when they ostensibly agreed to a deal. Children, mentally incapacitated people and companies, whose representatives are acting wholly outside their authority, are protected against having agreements enforced against them where they lacked the capacity to enter an agreement. Some transactions are considered illegal, and are not enforced by courts because of a statute or on grounds of public policy. In theory, people should only be bound when they have given their informed consent to a contract.

Learning note

After you have read the relevant material in this unit and the accompanying chapter in the book, it is good practice to reflect by asking as many 5W & H questions as possible:

  • What is a contract?
  • What' are the elements of a contract?
    • How is a contract formed?
    • Who is involved in a contract?
    • Who cannot enter a contract?
    • When is a contract formed?
  • Why do contracts exist?
  • What types of agreements are not contracts?

When you feel that you have begun to grasp the basic principles outlined on this page, it is time to tackle the elements of a contract. Go through the pages listed below and for each one take some time to reflect as suggested above.

List of sub-topics edit