Contract Law Basics…

Contract law can be very complicated, but at its heart it is very simple. A contract is an agreement between two or more parties, so why is it that the very idea can induce dread and confusion in so many people? Most people think of a contract as a large written document full of complicated legal terms, and yes, it can be, but it doesn’t have to be.

Let’s start by looking at the fundamental elements required to make a contract:

  • An agreement (offer and acceptance).
  • An intention to create legal relations.
  • Capacity to enter into contract.
  • Consideration (the exchange).

This means that when you buy a coffee or a sandwich, a contract is made to exchange money for food or drink.

Agreement

The first part in any contract is an agreement between two or more parties. In our example above, you offer to pay money in exchange for a coffee or a sandwich. The agreement is made when the seller accepts your offer.

Intention

Looking again at our coffee example, it may be difficult to see the intention to create legal relations, but it is there. When you make the offer, you intend to pay the money. When the seller accepts the offer, they intend to give you the coffee or the sandwich. These intentions are deemed to be an intention to create legal relations because it is a commercial transaction.

If, instead, your friend offered you a coffee whilst visiting their house and you accepted, there would be no intention to create legal relations because if you didn’t get the coffee you wouldn’t mind. If you didn’t get the coffee from the coffee shop, you would want that rectified as soon as possible.

Capacity

Linked to intention is the need for capacity. In contract law, the parties to a contract must have the legal capacity to enter into the contract otherwise the contract becomes voidable. For example, a child has the legal capacity to buy necessities or enter into educational contracts and those contracts are enforceable on the child. However, generally contracts with a child are voidable meaning that the child can end the contract at any time before becoming 18 or within a reasonable time afterwards. A party can also lack the capacity if they cannot, or are unable to freely consent to enter into the contract. This could be due to mental health, or being under the influence of alcohol or drugs.

Consideration

The consideration in a contract means that each party must give something in return for what they gain. When you give the coffee shop some money, they give you coffee or a sandwich in return. The money is your consideration, and the coffee or sandwich is the shop’s consideration.

Contract Terms

Another important factor in contracts is a certainty of the contract terms. The terms of the contract set out the obligations of the parties, so in our earlier example, you are obliged to pay money to the coffee shop, the coffee shop is obliged to give you the coffee or sandwich. These terms are called express terms and are either written or discussed as part of agreement of the contract.

There are also implied terms. These are terms that are not set out by the parties, but are implied by:

  • Fact – terms that would have been included had the parties thought about them.
  • Law – terms that must be present by law, generally described in statutes.
  • Custom – terms that are always included by local custom, there must be evidence of the local custom for this to apply.
  • Trade Usage – terms that are typically used in the trade but may not necessarily be set out by the parties because it is so common.

Both express and implied terms make up every contract and it is important that the terms are defined, but as mentioned earlier, the terms can be very simple as in our example.

Conclusion

As you can see, simple contracts are made all the time. If there is an agreement, intention and consideration, there is a contract. The contract can be oral or written, but it doesn’t matter if all the elements are there. In our example, the contract is oral, but the more commonly known form is a written contract such as a building contract or an employment contract. Building contracts do not have to be written, but it is generally deemed to be a good idea.

In future articles we will dig deeper into contract law, including looking at the differences between simple contracts and deeds and the ways of discharging a contract.

Contract Law Basics

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