Examining the Advantages of a Contract

“A Contract is an agreement, enforceable by law, between two or more persons, to do or to abstain from doing some act or acts”. CIPS BOOK

A contract is an agreement which gives rise to commitments which will be recognised by law and enforced in the courts. (Manson, 1993)

To understand the term contract we can define it as a legal binding agreement which is enforceable in the court of law. By enforceable it means that either party can sue the other party in the case of breach of a contract.

Agreement Vs Contracts

There is a difference between a contract and an agreement. A stand alone agreement on its own cannot be legally force able under English law. For example if someone has entered into an agreement and later on they decide not to comply with it then they cannot be forced to comply as they cannot be sued in the courts. It is to be noted that there is an agreement in the heart of every contract.

Formation of Contracts

As mentioned above, that contract is a promise between two or more parties to do or not to do something. Contract can be formed orally, by conduct or in writing. This means that contract does not have to be in writing to be valid. For example if a person goes to dominos to buy a pizza, he knows that he has to pay for the price of pizza but there is no contract in writing between the person and dominos.

Large organisations however wish to have a written contract so that all different types of terms and conditions can be documented. As far as legal requirements are concerned, it is not necessary to have a written contract unless the contract is of a particular nature. For example the contract for the sale of land, insurance contract needs to be in writing.

There are different structural elements involved for the formation of a contract. These elements are explained below.

OFFER

The person who makes the offer is known as an OFFEROR and the person who receives the offer is called an OFFEREE. Offer is one of the elements which form an agreement. The offeror gives the information about their product or service in detail to the offeree so that their offer can be considered. Once the offer has been communicated, following actions can take place which can bring the offer to termination.

Acceptance of offer

This happens when the offeree accepts the offer without any condition and then the agreement will be formed between the offeree and the offeror.

Rejection

The offer will be terminated when the offer is rejected by the offeree.

Counter-Offer

The counter-offer can be made by the offeree to the offeror. This will make the counter offer as the current or valid offer and the previous offer will be terminated Hyde v Wrench [1840].

Revocation

In revocation the offeror can take the offer back but it is only possible until the offer is accepted by the offeree. If the offer has been accepted then the offeror cannot revoke it.

Time

Normally offers are valid for a specific time period and after particular date and time the offers become invalid if no action has been taken. In case there is no time mentioned in the offer then the offer will be terminated after a reasonable time.

Acceptance

Once the offer has been made, the offer can be accepted by the offeree. The acceptance should be clear as unconditional acceptance which will make the agreement over the original offer. The conditional acceptance will actually be a counter offer and hence no agreement will be formed and original offer will be terminated Hyde v Wrench [1840].

There has been many examples where the counter offer has been treated as an acceptance and the matter was taken to court for the resolution. Hence the acceptance should be very clear in order to avoid any such circumstances.

It should also be noted that when the offeree is requesting information or data from the offeror against an offer, this cannot be taken as a counter-offer. Hence the original offer will still be valid in this case.

Communication of Acceptance

The contract cannot be formed until the offer is communicated to the offeror. Where the means of communication is instantaneous (oral, email, phone) the contract is created when and where the acceptance is received. There can also be situations which involves silence or conduct.

Silence alone cannot calculate to acceptance even if the offeror specify this. This can be seen in the case of Felthouse v Bindley [1862].

Conduct also contributes in acceptance. Silent conduct can amount to acceptance as in the case of Brodgen V Metropolitan Railway Company [1877].

Methods of Communication

As described above that communication can be by instantaneous methods such as telephone, telex, internet or fax, where the acceptance must be received by the offeror. If the communication is made through post then problems can arise if the offeror never receives the acceptance letter and sell the goods to some other party as in the case of Adams v Lindsell [1818].

Consideration

This is another essential part of a contract. If there is no consideration there will be no contract. By definition we can say that consideration is something of value in the eyes of law, which constitutes the price for which the promise of the other party is bought. For example seller receives £500 and in return promises to deliver or provide goods/products to buyer. The consideration for the promise of delivery is £500. The consideration has to be sufficient but it is not necessary to be adequate.

Intention to create a Legal Relationship

There is a strong possibility that the parties have intended to enter in to a legal relationship when there is a business or commercial contract. This presumption can be refuted but there will be a strong proof required to do that. In the case of Rose & Frank Co. v J R Comptom & Bros Ltd [1925], the defendant was not obliged to perform future orders because it was specifically said that there was no intention for it to have legal consequences.

Privity and third-party rights

According to the doctrine of privity of contract only the parties of the contract can sue each other in the court. So the parties to the contract can only sue the other party in order to claim damages or to enforce their rights. The application of the doctrine of privity can be seen in Dunlop Ltd v Selfridges Ltd [1915].

The doctrine of privity of contract is a reason for many practical difficulties and that is why the law has come up with different solutions to these problems. One of these issues is related to subcontractors. From legal perspective, subcontractor does not have any direct contractual relationship with the purchaser and hence cannot be sued by the purchaser because they are the third party. To get around this problem, purchasers can add special clause in the negotiation phase of the contract that the main contractor will be liable for any breaches by subcontractor.

From third party’s point of view, they were not involved when the contract was being formed between the purchaser and the main contractor. Hence they may have little or no influence on the terms of the contract. But if any problem arises then the subcontractor will not be in a position to sue the purchase as according to doctrine of privity, as they are not the party of the main contract.

Parliament tried to tackle this problem in an attempt to bring this area of English Law in line with the law of other European systems with the Contracts (Rights of Third Parties) Act 1999, which provides rule by which third-party rights can be granted in the main contract. According to the Act some clauses can be entered into the contract which will allow the third-parties to enforce their rights through courts.

Capacity

Capacity refers to the capability of any organisation or business to carry out their duties and responsibilities. The doctrine of ultra vires limits the power of a company to enter into any contract which is beyond its powers. If the company enters into a contract which is beyond scope of its powers then that contract will be void.

Classification of Contract Terms

The contract terms are mainly divided in two categories:

Implied Terms

Express Terms

Implied Terms

“An Implied term is a contract term which has not been expressly agreed, drafted and included in a contract by the parties; instead it is implied into a contract by law regardless of whether both parties agree to it or not.” King 2006.

Whereas implied terms are those terms which are not expressed by either or both parties orally or in writing and hence are not part of the contract between the parties. The existence of implied terms depends upon legal rules, which determine in what situation the law will imply terms into a contract. Some of these terms are implied by common law rules developed by judges and some are implied by statutes such as Sale of Goods Act 1979.

For example Sale of Goods Act 1979 (as amended) will be implied in the contract for the sale of goods wherever applicable St Albans City and District Council v International Computers Ltd [1996].

Express Terms

Express terms are those terms which have been specified and agreed by either or both parties and have been included in the contract. There can be many different types of express terms in a contract. Some of the most important terms for business contracts i-e for the supply of goods and services are mentioned below.

Conditions and Warranties

Condition is a vital term of a contract which goes to the very root of the contract. The contract will be at high risk if condition is breached. Breaching a condition is a serious matter and it entitles the other party to claim for damages and to terminate the contract. Poussard v Spiers and Pond [1876].

Whereas warranty is something which is not that critical to a contract and breaching of warranty will not entitle the damaged party to terminate the contract, but it will only allow claiming damages. Warranty is referred as a minor term of a contract something that is secondary to the main thrust of the contract. Bettini v Gye [1876].

When a buyer and seller are agreeing on the terms of contract, they can decide which terms are conditions and which are warranties. However there are situations where few terms are forced into the contract regardless of parties’ wishes. For example terms implied by sections 12-15 Sale of Goods Act 1979 (as amended) (SGA 1979).

Innominate Terms

In the stage of negotiations, the parties can specify the terms as conditions and warranties. Same way the statutes specifies the category of implied terms whether they are conditions or warranties depending on their importance. However those terms which are not categorised by the parties and statutes as conditions and warranties, such terms are classified as innominate terms by courts. They are also referred as intermediate terms. When parties breach innominate terms then effect of such breach is taken into consideration as how serious the consequences are when the breach actually occurs. Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisa Ltd [1962].

More Standard Terms in a Contract and Potential Disputes

The below mentioned terms are some more standard terms used in the contract for the sale of Goods and Supply of services. These terms along with other terms specified above could be the reason of dispute among the parties.

Liquidation damages clauses and penalty clauses

Liquidity damages are those charges which one party pay’s to the other in the event of breach. Liquidity damages clauses are often used in the contracts as it entitles the party to take money from the other party without going to courts. These clauses help both parties in a way that supplier will certainly know the amount they will be paying to the purchaser in case of breach and the purchaser will know the exact amount which they can deduct from any monies payable to supplier.

Liquidity damages clauses need to be drafted carefully in the contract. It is vital that the damages claimed are a true pre-estimate of the losses which are expected to occur in the case of breach, otherwise the court will interpret such clauses as penalty clause and hence it will be declared void. Such clauses can be applied in the contracts for the sale of goods such as equipment and also for the supply of services such as software.

Guarantees

Guarantee clause can also be added in the contract where the seller provides guarantee for the supplied goods. However usually the guarantees are provided by the main manufacturer and as there is no consideration passing between the consumer and the manufacturer there may be no contract between them hence guarantees may not be legally enforceable.

In the case of software, the seller may give a time period for the testing of the software and after the successful completion of testing phase, the buyer will normally charge more for any changes or rectification.

Payment

According to Sale of Goods Act 1979, once the price of the product has been agreed between the parties, then the purchaser is liable to pay that price. Once the items have been accepted, the seller can sue the purchaser for the payment if it remains unpaid. If the contract states that time is ‘of the essence’ then the seller can terminate the contract otherwise seller can only claim for damages along with the payment in the case of late payment release. Under Late Payment of Commercial Debts (interests) Act 1998 (LPCDA 1998) the seller has the right to claim interest at a rate of 8% above the base rate on any late payment. LPCDA 1998 also states that if there is no payment time mentioned in the contract then the monies fall due 30 days from either the date of delivery or the day when purchaser receives the invoice from the seller, whichever is later.

The payment terms can be applied for the sale of goods contracts and for the supply of services contract.

Confidentiality

Confidentiality clause is used to secure the information of an organisation. The organisation might have some commercial information which can be used by the other competitors in the market in the case of disclosure. Hence for various reasons an organisation can enter the confidentiality clause or non-disclosure clause in the contract to protect their information. This clause is important in the case of software provision as well.

Liability to a Contract

When buyer and a seller go under a contract, then they are liable for their responsibilities as agreed and mentioned in the contracts. There may be some situations where the parties may not be able to perform their duties and in such situations they try to limit or exclude their liability which is explained below.

Limitation to Liability / Exclusion Clauses

These are the type of clauses used by parties in a contract to exclude or limit their liability to the other party in the case where the party cannot fulfil their duties under the contract. Limitation clauses are used by organisations to limit their liability and an exclusion clause refers where party attempts to exclude or be exempt from all liability.

Another very important and common clause used in contracts is force majeur clause which is a type of limitation clause. Due to some unforeseen situations, the parties can get into trouble in performing their duties under the contract and creates frustration for the parties. As this unforeseen situation is beyond the control of parties hence they end up in terminating the contract by frustration. Force Majeure clause can be used to avoid such frustrated situation and such events can be added in the force majeure clause at the time of contract formation. Taylor v Caldwell [1863].

Contract Termination

Parties can specify in the contract the contract duration time or when the contract will be terminated. If the contract specifies that the contract is valid for 12 months then the contract will be terminated after that time. If the contract specifies a particular transaction only instead of time, then the contract will be terminated after that transaction.

A contract can also be terminated as a matter of frustration. An example of frustration could be found in Taylor v Caldwell [1863].

Intellectual Property Right

This is an important issue to consider while dealing with the contract related to provision of software. It refers to the ownership of the software or website codes. If the software or website is developed by a supplier, when the copyrights will be transferred to the buyer? This could be a serious dispute between a buyer and a seller. Hence the contract needs to mention the transfer or owner of the copyrights for the software or website.

Resolution to Contract Breaches

As discussed above, there are many reasons where parties can go under disputes and their relation get into risk. Hence in order to resolve the disputes the parties seek dispute resolution. The disputes can be resolved in no of ways and these are:

Negotiation

The first attempt of the parties would be to resolve the matter by negotiations. This is a recommended and a wise way of dealing with disputes between the parties. The negotiation is done by the parties themselves and they sit together to get a win-win situation.

Conciliator

Another way of resolving disputes could be the conciliation. Matters are resolved by the assistance of a conciliator. A conciliator is an individual or an organisation which deals with each party separately in order to resolve their disputes. Conciliators are good negotiators and hence they attempt to resolve the issues by improving communication, giving technical assistance, understanding issues, exploring positional solution and bringing out a negotiated settlement. However conciliation process has no legal standing, no authority to call witnesses or seek evidence. Also they are not able to write a decision or make any award.

Mediator

Mediation is another type of dispute resolution. Like conciliator, mediator is also a third party which is used to resolve the matters between the parties. Mediator encourages all the parties to focus on their business and commercial interests instead of legal rights. Mediator also has no legal standing and hence cannot force the parties on their decision.

Arbitrator

This is another type of dispute resolution. Arbitration is more famous in the business companies as it a legal technique for the resolution of disputes between the parties but without going into courts. Parties can choose the arbitrator of their choice. Arbitration is less expensive and quicker in making decisions as compare to litigation. Arbitrator’s outcome or award can be enforced in the same way as a court judgement.

Litigation

Litigation is a process where the damaged party go to courts to seek the resolution. The court after reviewing the contract and both parties statement gives their judgement. The judgement of the court is legally enforceable and hence the parties have to accept the decision or they can go for appeal.

Why Buyers enter into a contract?

Buyer under a contract can receive remedies when a seller is in breach under the contract. This means that a buyer has failed in performing something which he promised to do in the contract. This gives the buyer the chance to claim remedies. Remedies could be in the form of compensation or bringing the contract to an end in advance. Under law, buy is applicable to claim damages, compensation or termination of contract when the seller is not performing as promised in the contract. If the buyer is also a consumer then they have more rights to rely upon because in the eyes of law consumers are more vulnerable to fraudulent businesses. Other benefits that a buyer can get by getting into a contract are the better prices and better payment plans.

Benefits of CISG

CISG stands for Contracts for International Trade of Sale of Goods. The primary difference between the standard or national contracts and international contracts for sale of goods is that international contracts are entangled with other contracts like the insurance contract, contract for carriage of goods, contract with a bank to provide payment for the goods / products etc.