We all regularly enter into contracts as part of our day-to-day lives.
When you buy your morning coffee, rent a property, take on a new job, or sell your unwanted stuff on eBay, you are entering into a contract with someone else.
It is therefore important to have a basic understanding of contracts and how they work so you can avoid common misunderstandings and potential risks.
What is a contract?
A contract is a binding and enforceable agreement between two or more parties. There are 4 basic elements that need to be present for a contract to be enforceable. They are:
Offer: A contract starts with one party making an offer to another such as offering goods for sale, offering services, or a job.
Acceptance: The other party can either accept the offer or reject it. Acceptance can be either by words or conduct and so the fact that you do not sign the contract does not necessarily mean it is not binding.
An intention to create legal relations: The parties must have intended to enter into a legal binding agreement. This might not be the case in situations like private, family arrangements.
Consideration: Consideration is what is given in return for the thing being offered. Usually it will be payment of money but it could be something else. For example, a promise to exchange a pint of milk in return for a carton of juice still includes consideration (in this case, the juice).
Written or verbal?
With the exception of contracts for the sale of land or property, a contract does not have to be in writing to be enforceable in the UK; a verbal contract can also be enforceable.
The difficulty with verbal contracts is that it’s harder to prove you have a contract with someone if it is not written down.
This does not necessarily mean that you need a long, complicated legal contract. It can be as simple as an exchange of emails setting out the agreement. The more detail, the better, but at least something in writing is better than nothing.
Who is your contract with?
A party to a contract has to be a legal entity which is an entity that the law recognises as capable of having legal rights and responsibilities. This could be an individual or an organisation such as a limited company, a partnership, or a Plc.
It is important to get the party names right in case there is a dispute later on. Be particularly careful of trading or brand names. For example, Greggs bakery trades simply as “Greggs” but the legal entity you contract with when you buy your lunch there is Greggs Plc. If you were to go to court and sue them, you have to get the name right when you do it.
Contract terms
For a contract to be enforceable, its terms have to be clear.
Terms will cover things like: what is being sold, the price, how to pay, and time for delivery. They can also cover things like ending the contract (termination), renewal, price increases and limitations on liability which can be important but are often ignored.
It is not always possible to negotiate the terms of a contract, particularly when you are consumer and the terms are just sent to you as take it or leave it.
However, even though none of ever read the terms (!), you should check them carefully, particularly for large purchases or where it is an employment contract.
If in doubt, ask whoever gave you the contract a question, or get separate advice. Once the contract is agreed, you are usually stuck with the terms that have been agreed, even if you didn’t actually read them at the time.
Implied vs express terms
Just to confuse things even further for you, a contract is not limited to the terms that you and the other person write down. The law will sometimes add some other unwritten terms into your contract.
The terms that you both agree, whether verbally or in writing, are called express terms (as in, terms you have expressly agreed). Terms that are added to a contract by law are called implied terms.
An example of an implied term is a term that goods sold to a consumer will be of satisfactory quality and fit for purpose. Even if the actual contract doesn’t say this, it will still apply and the seller has to comply.
Performance
Once the contract is agreed, the next stage is what we lawyers call “performance”. This is where each party to the contract does what they said they were going to do.
If one of the parties doesn’t do what they were supposed to do, we call that a breach of contract.
Breach of contract
To identify whether someone is breach of contract, we start by looking carefully at what they agreed to do. This means looking back at the terms of the contract (go up a few steps).
We then look at what the person actually did and compare the two. If they didn’t do as they said they would, they are in breach.
It’s not always that simple though! It is often hard and hotly debated whether someone is in breach or not.
Further advice
This gives you a very brief and basic run down of contract law which we hope you will find helpful.
If you do have any doubts about signing a contract, or if you need one drafted, get in touch with us and we’d be happy to help.
If you are unfortunate enough to get into a breach of contract dispute, we strongly recommend getting early advice. Expensive, stressful and complicated disputes can often be avoided by quick and early help and intervention.
