10 key facts about English contract law

In this article James Normington of New Park Court Chambers explains some of the key points of English contract law. Every businessman and women should be familiar with these concepts.

Contracts occur in every business. It might be as simple as the agreement with the milkman to deliver the milk and your obligation to pay for it, or it might be an order you made with a major supplier. There is one thing which you can be certain of, which is that you don’t want to find out there is a problem with your contract when you are walking through the door of a courthouse with a disgruntled person on the other side. 

This contract focuses on English contract law, which shares many common features with other common law jurisdictions such as Australia, New Zealand, Canada and the United States, although individuals from those countries should always seek appropriate legal advice.  

1) Privity of Contract

It is important to remember only the parties to the contract may enforce the terms of the agreement. So for example if Mrs Smith promises to deliver a chair to Mr Jones’ office for £100, which will be paid on delivery, Mrs Smith must deliver the chair on the agreed terms. Mr Johnson, Mr Jones’ employee, who is to sit on the chair cannot sue Mrs Smith if she fails to deliver. Only Mr Jones could sue Mrs Smith for not delivering the chair.  

2) Consideration

Contracts must contain mutual promises, or obligations, between the parties making the agreement. For example in return for Mrs Smith delivering the chair Mr Jones agrees to pay £100 on delivery. The obligation is the delivery of the chair and the consideration is the £100. If there is no mutual obligation then there is no contract. For example if Mr Jones takes his wife to dinner dance, and at the end of the evening the cloakroom attendants return their jackets; Mr Jones tips the cloakroom attendant £10 that is not a contract. There was never any consideration. Mr Jones has simply given the cloakroom attendant £10 by way of a gift or a gratuity. The cloakroom attendant has not performed any pre-agreed service for the £10.

Consideration should current in time and one cannot rely on “past consideration”. An example of past consideration would be if Mrs Smith gives her neighbour £100 for a birthday. The day after the birthday, Mrs Smith asks the neighbour to help her paint the fence. The £100 is not consideration for any agreement to paint the fence, that was a voluntary act, and helping paint the fence came after that voluntary act.

Consideration must have an economic value in order for it to be valid in a contractual context.

3) Exceptions to the rule on Past Consideration

There are two exceptions to the issue of past consideration. The first relates to an antecedent debt. The Bills of Exchange Act 1882, means that a pre-existing debt or obligation can be good consideration for a bill of exchange. For example, if a landscaping company mow the lawn at Mr Johnson’s house and then a week later he sends them a cheque for £25 in the post that is “valuable consideration”, even thought the landscaping company’s mowing occurred in the past.

There is a more common exemption which all businesses should be aware which comes from a case called Lampleigh v Braithwait. This exemption means that if a business asks a party to perform an obligation there is an understanding that the performing party will be remunerated in some way. For example if the Directors of ACME Limited ask Mr Smith, a patent agent, to obtain patents for their machines, and there was a discussion as to dividing the profits of the patents with Mr Smith. Mr Smith upon obtaining the patents would be entitled to a division of the profits, even though the act for which he is to be remunerated occurred in the past.                  

4) Formalities

There are very few formalities that are required by law. There is no longer a requirement for all contracts to be signed as deeds, and the requirements for signing, sealing and delivery of deeds has also been abolished. 

While it is good practice for all business contracts to be in writing it is not essential. The contract may be formed orally, by parties agreeing the terms on the telephone. There is an obvious disadvantage to an “oral agreed contract”, which is that the orally agreed terms may be misunderstood, or misremembered by the respective parties. That in itself can lead to problems. In the event that an agreement is reached on the telephone or in person it is always best practice to condense the agreed terms into writing. For example a letter summarising the terms sent by email or fax, should be sent to the other side with a request that they confirm and acknowledge the written terms reflect the agreement will suffice for most routine agreements. 

5) Contracts which must be writing

There are several types of contracts that must be in written form. For example, contracts containing a guarantee must be in writing. A guarantee is an agreement where one party agrees to pay the debt of another individual or company in the event that the third party defaults on the debt. Contracts relating to the sale, transfer, option or lease of land should always be in writing. Another common situation where writing is required is for contracts for the assignment or exclusive licensing of certain intellectual property rights.

6) Authorised Signatures and Authorised Persons

One of the mistakes made by many small businesses is in obtaining the signature of the correct person on a contractual agreement. Legally, to bind a company to a contract, it must be signed by a person who has the authority to do so. This would normally be a director of the company, its solicitor, or a manager. Far too often in my experience small businesses enter into transactions sending a written contract for a signature and they failed to ask the questions to confirm that the individual whom they are dealing with is legally representing the company. It can be as easy as obtaining confirmation in the form of an email or fax stating that “Joe Bloggs” is Director of X Ltd and authorised to sign on behalf of the company. 

An equally important point to note is that the name of the company is written correctly both in the agreement and on any invoices that are submitted. It may seem a small thing but a small businessman discovered to his credit that missing off “Limited” from his company name meant that he was personally liable for the debts he incurred. A court found that he was doing business in his own right as ABC Fashions rather than as ABC Fashions Limited. Such errors may seem little but they can be very costly.    

When dealing with local authorities, it may be necessary to obtain the “seal” of the corporation to the contract. The seal of a local authority binds the relevant local authority, in the same way that having the signatures of the board of directors would in the case of Limited Company. 

7) Capacity

This goes hand in hand with the issue of authorised signatures, and authorised persons. In English law a minor, that is an individual under the age of 18 does not have capacity to enter into a contractual agreement. Contracts signed by drunks, the mentally ill, the certifiably insane can all be declared void by a court of law. Interestingly, minors, drunks, the mentally ill, and the certifiably insane can be legally obliged to pay for “necessary items”, such as food, clothes and water. It is however best practice to avoid dealing with such individuals as it will provide lawyers with all kinds of interesting issues, and cause an unnecessary and costly legal dilemma, for your business!     

8) Battle of the Forms

In cases where businesses are dealing with “standard terms” it is important to remember which “standard terms” apply to an agreement. In this example A Ltd contacts B Ltd requesting the supply of 1000 widgets. As part of the request it sends an email enclosing A Ltd’s standard terms and conditions for the procurement of widgets. B Ltd accepts the order of 1000 widgets from A Ltd and sends an email back saying 

“Thank you for your order of 1000 widgets. We have accepted the order pursuant to our standard terms and conditions, and will make deliver to your premise by the 31st of this month.”  

A Ltd simply replies enclosing payment at the agreed price.

In law this type of scenario is referred to as a “battle of the forms”. The issue is whose standard terms apply to the transaction. Under the “battle of the forms” rules it is party who fired the last shot that has its standard terms and condition incorporated into the agreement, not the company that sends them in first. 

9) Exclusion Clauses

It is common to see in many contracts clauses which limit or exclude liability in the event of breach. The difficulty with such clauses is that the courts construct them on a very narrow basis. The courts have determined that clauses that seek to limit liability in the event of a fundamental breach are largely unenforceable. The reason for this is that in the event that one party breaches there must be a remedy open to the other side. It is quite unreasonable for one party to seriously breach a contract and for the non-breaching party to have no or little legal remedy.

Exclusions clauses in standard term agreements are also likely to fall foul of the Unfair Contract Terms Act (“the Act”). This is particularly relevant when doing business with the public. The Act seeks to put the parties on an even footing, giving a court the power to remove clauses that would be unfair, or offer the party drafting them too much of an advantage. One common exclusion clause which is frequently dismissed as unfair is any term which seeks to remove liability for death or injury. Such terms are almost always struck down, and should not be relied upon.     

10) Breach

Where one party does not perform their obligations as per the contract they commit a breach of contract. A breach of contract is technically a failure to perform the contract in accordance with the strict terms. For example if one party requests and pays for one tonne of coal to be delivered to his home address on the 21st of January, and only 800kg are delivered then he is entitled to seek cash reimbursement for 200kg of coal that was not delivered. There is however a defence open to the delivery company if they can show that the difference is so small that it de minimis. Such arguments are always based upon the particular facts. In this case 200kg of coal is highly unlikely to be declared de minimis. If there had been delivery 999kg of coal then there may be a stronger argument. 

The non-breaching party should place the breaching party on written notice of any breach of contract before issuing court proceedings. The attitude of the courts in recent years has been to push parties towards mediation of contractual disputes in order to resolve differences. It is good practice for the non-breaching party to outline a conciliatory basis upon which the breach can be remedied. For example in the case of 200kg, it might be for the remaining 200kg to be delivered as soon as possible or for the delivery company to repay the difference in price as soon as possible. 

It is open to a non-breaching party to repudiate a contract in the event of a very serious breach of a contract. Repudiation means giving up the agreement and considering the contract to be at an end due to the breach committed by the other side. In these circumstances the non-breaching party would be able to claim financial compensation from the breaching party to compensate the non-breaching party for the breaching party’s failure to perform the contract. The non-breaching party would also be able to do so without completing its obligations under the contract. Effectively the non-breaching party would be declaring to the other side that the contract is at an end due to the serious nature of the breach.

Comments

When my husband and I changed business bankers, the new bank asked for peronal guarantees from the two directors charged on their matrimonial home. Five years later I was made bankrupt. The equitable part of the property that belonged to me was acquired by the Trustee in Bankruptcy, but I was later able to buy this back for a nominal sum. How does the bankruptcy affect my part of the personal guarantee to the business bankers?

I had a contract with a compliance checklist.  The scrawl that was the signature was placed in the date box, yet it was their form!  Nothing typed out to know who the scrawler was.  I did witness the form being "signed".  

Also their correspondence has only their name as a generic title, say easy group instead of easy group (Europe) limited, but the heading on their Terms and Conditions does have easy group (Europe) limited ("easy group"), however another form (with signature in date box) that is part of the contract is for and on behalf of easy europe and states in the body that this forms part the overall contract with the easy europe limited terms and conditions.  I have paid an initial sum for their services and they are chasing me for the balance.  But who are "they"?  Can I get my initial sum back?

The contract, if it is one, is subject to the laws of England and Wales.

Hi,

Would an email from me to all involved parties, authorising a friend to sign/authorise a legal document/contract on my behalf (because I would be away at the crucial time) suffice as an acceptable arrangement in law?

Many thanks.

My daughter's private school informed us that they were closing the school after a short consultation period. They told us of the closure plans after the beginning of the term so we could not give a full terms notice to leave the school and they intended to run the school until the end of the next term so the school would still be open. In the event the school was passed to another organisation and will continue. I still want to remove my daughter because the classes will be drastically reduced in size and her new school needed us to take up the place straight away. The original school is insisting that the new owners will pursue us for a full term's fees. Can we contest this?

Hello Alasdair and thanks in advance.

My friend booked a house in Holland for 5 days via an agency. She was quoted 525 euros and accepted - all was done by email.

My friend asked for some clarification and the final bill turned out to be 638 euros.

2 days and some hours later she cancelled.

Previous correspondence had advised that the email transaction was legally binding once the final offer had been made and accepted and referred to their "standard terms and conditions" and providing a link thereto.

The cancellation period turns out to be a mere 2 days and 30% cancellation fee is being demanded.

Your advice keenly appreciated thanks.

David

Hello, my wife and I agreed to a 24 month tenancy with an immediate break clause, we have a letter from the Agent stating that the landlord agrees to this.  With the letter was a tenancy agreement, that we signed.  It turns out the agent, by mistake had put a 12 month break clause in it! (DOH!) The agency have said that they are fully aware that they made a mistake, but that now it is signed it is legally binding. They have stated it says within their notes that an immediate break clause was agreed. Now I want to give notice - what can I do? Help please

I signed a contract for a lease hire car to be paid by salary sacrifice. there was a 6 month wait for the car and with a week to go before I would have received the car I withdrew from the contract which was acceptable in the terms of the contract. Shortly after cancellation the lease hire company contacted me to say that there was a cancellation charge of £1000 because their supplier had invoiced them for that amount. I commented that there was no mention of a cancellation fee anywhere in the contract. They agreed that was the case but a guide book which was part of the information package sent to us stated that "there might be a cancellation fee". I queried the contractual validity of this as the guidebook was not cross referenced with the contract and we were not instructed to read the guidebook but were instructed to read the contract. I also asked for a breakdown of the figure of £1000. 6 weeks on I am still awaiting clarification and the lease hire company are still requesting the fee, although they have now reduced it to £450, which still seems arbitrary. The lease hire company have recently approached my employer to try to get the money directly from my salary as they say that their contract is actually with them, not me. So at the moment I am in dialogue with my employer(a local authority) and the lease hire company. I have offered to pay the cost of taxing  and registering the car if this is a cost that has been incurred, but it still await clarification regarding the contractual obligation and how the figure(s) gave been calculated. I would welcome any thoughts you might have on this matter.

Can someone please tell me what is the difference between entering and enforcing contracts between a partnership or a third party and a company?

Thanks.

... "a partnership, a sole trader and a company"?

We often deal in contracts which are based on a standard type which is duly altered during the negotiation, it is common practice that the deletions and additions are visible as strikethroughs and bold letters.  My question is, in the case of the dispute, a court will consider the relevance of the wording that was deleted ie the negotiation, or whether the court only considers the contract as it reads and completely ignores all deletions and terms that were negotiated but did not make it into the final contract? Thanks

The general rule is that such evidence is not admissible, but there are circumstances where this rule does not apply.  E.g. see:

http://www.boyesturner.com/news-article.html?id=874

Hi. I have question to ask.

A decided to use the facilities of Company B during his holiday at the company's hotel. He then paid the deposit beforehand. But then, A asked for 50% discount from the actual amount that he had to pay and the manager of Company B orally agreed. At the end of A's holiday, he paid the remaining amount from the 50% discount given earlier and Company B accepted it as a full payment. Later, Company B suffered a downtown in business due to credit crunch and decided to seek the claim of remaining amount (before discount) from A.

Does A have to pay the said amount?

Without knowing all the facts, it is difficult to be certain but, if I were A, I would likely be arguing that Company B was estopped from denying the validity of the discount. For background, see:

http://en.wikipedia.org/wiki/Estoppel_in_English_law

Thank you for the answer. 

However, can Company B also argue about the validity of the oral agreement by the manager - i.e. does he has the authority to give the discount?

Hi. Is there any argument that can be raised in favour of Company B?

Your thoughts and opinions are greatly appreciated!

From Company B's perspective, you would want to argue that the manager didn't have actual authority to grant the discount, and did not have ostensible/apparent authority either.  Would a reasonable customer suppose that the manager in question had the necessary authority?

I am disabled and I went to a shoping retail park. The parking is free. As the disabled parking bays were full I parked in the nearist bay to the shop. The bay had a white line to the left but no white line on the right instead there was a brick wall. As I entered the bay there was a dip in the tarmac. With the wall and the dip I moved to my left: parked to the right it would have been hard to get out of the car .I did not obtruct any other motorist. I was in the shop for 30 min. When I returned to the car i had a ticket on my window with a fee for 90 pounds. I have not replyed to any of there letters. It is 150 pounds now. Is this contract law? And how do I stand by law? Thank you,

A short while ago I asked an agency to supply home help to my aged invalid mother - their service was so bad that she requested me to cancel them, which I did. No mention was made to me at the time of employing them that there would be a cancellation fee, nor at the time of cancelation did the director of the company mention this.

I assume the contract must contain some reference to this aspect but I was only told at the time that signing was just to allow their staff to enter my mothers property. They now wish to charge a fee of £336.00 cancellation fee on top of the £140.00 for the visits actually made. Although am willing to pay for the service we had (even though it was very poor) the cancellation fee seems very underhand, particularly as it was never mentioned at any time (no copy of the contract was given to me either).

What do you think of the chances of the company if they went to court for the £336.00?

Company A contract Company B to complete some work. A formal contract is issued but not all the terms are agreed and the contract is never signed. In the meanwhile the work is completed within specification and time. SInce there is no issues A is willing to accept all terms and conditions as amended by B. Can A withold payment to force B to sign contract (purely as a formality)?

Cheers.

... no. Whether the terms of the "formal contract" apply may be moot, but that doesn't mean there isn't a contract (and as part of that contract, an obligation to pay the agreed amount).

The dilemma is this: Miss A took a course after reading the details on the company website she called them & took the 5 day course which was £799 but was offered at a discounted price at £699 & even though it states on the website VAT not included the company took payment of £699 then another of £139. Is this a breach of contract? Can Miss A ask for a refund? Also Miss A was told the course started at 9.30am but did not untill 11am is this breach of contract? 

Eargerly awaiting reply.                                                                                    

Thank you kindly in advance.

"VAT not included" means, usually, that VAT is payable in addition to the principal amount. However, if this was a B2C contract then a VAT inclusive price should have been quoted.

How was the additional amount taken? From a credit card?

The failure to start the course on time may amount to a breach, depending upon all the circumstances...

If anybody knows GMS contract, could you please help me with some advice. I was a GP Partner. Due to a partnership dispute at the GP practice following the publicly notified (London Gazette) retirement of my partner, we couldn't agree on letting one of the partner to continue the contract. Our GMS contract was terminated, as we both signed in the heat of the moment an application to terminate the contract. We both regret now as the ensuing liabilities can bankrupt us! I have challenged the termination now based on the fact that NHSE representatives were partisan, they arbitrated, took sides in the dispute during the meeting as against the provisions set in GMS contract to remain neutral, gave me short notice of the meeting, I had no opportunity to have legal representation, no LMC members present,had signed the application to terminate the contract under duress, I was not given any advice regarding the consequences of termination of the contract nor given details of the procedure, usual notice period required etc. hence I have said that NHS has not followed the right procedure and was unfair. Could anybody throw me some light whether I could get court injunction based on the above facts.

Any help will be highly appreciated.

Go and see a solicitor about this.

Hello, can a private car parking company hold me responsible for a parking fine which occurred whilst parking on a business property that they have a contract with? I'm assuming that the contract is between them and the landowner and not me as the customer. 

As noted above, this is not an area of law with which I am familliar.  Please see the links I list above.  As far as I can determine (in a couple of minutes), there could be a contract between a person parking on private land and the landowner, assuming there are prominent signs displaying the terms on which parking is permitted/prohibited.  Otherwise, any right to recover would likely depend upon the law of trespass.  The car parking company are likely to be acting as an agent (or other form of legal representative) to enforce the landowner's rights, not their own.

I rec'd an inv for yearly service charge in advance for my leasehold flat. Inv was dated 17/1, due date said 17/1, sent 21/1( have franked envelope) rec'd 23/1. I paid 18/2 in full. Managment company have charged £21 late payment fee despite the lease and invoice not stating terms other than back of invoice says I should pay on payment due date, i.e 17/1. Can this be correct. How can you pay for an invoice on the day they printed it and not in receipt of it? I have applied the 30 days from receipt from reading direct.gov on invoices. There is a line on invoice which says ' Please note if payment is not received and a reminder letter is sent an admin charge of £21 may be applied. The letter arrived the date after I paid. When I rang to query their a/cs dept say I had 14 days from date of invoice, customer service yold me 28 days and to add insult to injury they applied my payment (made on line on their portal on 18/2 in which it autogenerated an unique ref) the following day saying they update their staments manually!!

Please advise where I stand in terms of the law as I feel this is an unfair charge and they are not communicating clearly to their customers.

This sounds like sharp practice, at the least.

The date the invoice is due for payment will depend upon the terms of the contract between you and the service company. What does that say?

A PPI claims company should have charged 30% plus VAT from our PPI claim but they invoiced us for a much lesser amount we paid it by phone and asked if that was all we had to pay; they said yes. They have now reinvoiced us stating part payment for the amount we have paid plus added another £2000. By law, do we have to pay?

Hello

If I buy an eBook online and pay by PayPal, is there a contract?

Thank you

shan

When you buy something, there is usually a contract. You don't need a formal written document for a contract to (legally) exist.

I just wanted to ask, I was looking for a kitchen online and found one through a private seller after several e-mails I foolishly said about offering a 50% deposit, I then looked into the price of the kitchen and found that I would be paying more because of travelling costs. I said that I no longer wanted the kitchen, the seller said that I was in breach of contract and if I did not follow through with the sale that they would take me to court, I spoke with Trading Standings who said that if the seller were to suffer a loss then I would be liable. The seller had clearly stated that they could return the kitchen to B and Q for a refund, I put this to the seller who then said that I have 14 days to fulfil my side of the contract other wise I am in breach of contract and they will take me to court.

Does this person have a case, they do not have my address details only my mobile number.

Thanks for any advice

Cherry

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