Commercial Law Frequently Asked Questions…
When it comes to Commercial Law Frequently Asked Questions, ensuring you get the right answers is important, Tollers experienced team provide the answers…
What remedies are available for breach of contract?
The main remedies available for breach of contract are usually termination of the contract, damages, injunction or specific performance. However, it is important to review the contract itself in each situation as the parties may have agreed in the contract to amend the common law remedies available. For example, we often see liquidated damages provisions (where damages for breach are capped at a specific amount), specific indemnities, limits on bringing a claim and early termination provisions.
When is a contract formed?
A contract is formed when five key elements have occurred. These key elements are: offer, acceptance, consideration, intention to create legal relations and certainty of terms. A contract does not need to be in writing and can be formed by oral agreement. It is important for business owners to be careful not to inadvertently create an enforceable contract accidentally and prematurely for example by their external behaviour.
Can I delay payment under a contract?
You cannot delay payment if you have a contractual obligation to make a specified payment at a specified time to a specified entity. Late payments will attract interest and can cause issues for the payee such as reducing their cash flow. If a payment isn’t made on time then the payee may be able to terminate the contract and make a claim for damages (especially if “time is of the essence” for payments). Don’t delay making a payment!
Does a written contract need to be signed to be effective?
Some contracts must be in writing and properly executed to be effective eg for the sale of land. Contracts can be verbal or in writing provided that there is an offer, acceptance of the offer, consideration (usually a payment), certainty, and the intention to create legal relations. An unsigned written contract may be evidence of the intentions of the parties but this will be decided by a Court
Does an oral agreement constitute a binding contract?
You can have an oral contract that is legally binding provided that it complies with the requirements to create a legally binding contract namely, that there is an offer, acceptance of the offer, consideration (usually a payment), certainty, and the intention to create legal relations. However, the problem with oral contracts is that there is usually no evidence of it. Oral contracts are likely to cause problems such that it is always better to have a written contract.
What are ‘express’ and ‘implied’ terms?
An express term in a contract is one that is written into an agreement or that is made clear orally (don’t forget there is such a thing as an oral contract). An implied term is one that is usually implied by legislation (usually to protect consumers) or custom and practice. Some implied terms can be excluded if that is done as an express term. Some implied terms cannot be excluded (especially in consumer contracts), eg a seller owns the goods they are selling and damages for death or personal injury.
What can I do if someone’s not paying me for work I’ve done/products I’ve supplied?
Take proceedings to recover the price or to recover the product supplied or to stop the customer from using it. In a well-drafted set of sale terms, there is usually a retention of title (ROT) clause which states that ownership won’t pass until the product is paid for. You can have a similar term for services such as marketing or design material, ie you retain your copyright in the material until payment.
What constitutes ‘offer and ‘acceptance’?
A contract is made when various elements come into existence and those main elements are: offer, acceptance, consideration, intention to create legal relations and certainty of terms. Don’t forget that all of these elements can be present in a conversation(s) hence the fact that oral contracts can be entered into. An offer is a promise by one party to enter into a contract on certain terms. The offer has to be: specific, complete, capable of acceptance and made with the intention of being bound by acceptance (ie an offer is not just a social invitation or an indication that somebody is will to discuss a matter – an invitation to treat).
Acceptance is what needs to happen when an offer is made and can either be confirmed orally, in writing or by conduct. Distinctions have been made between parties agreeing on a course of action via a memorandum of understanding (which is subject to agreeing a contract) and one of the parties claiming that acceptance of a contract was made when they carried out the terms of the memorandum. The court decided that the memorandum had to be converted into a contract before it became an offer that could be accepted.
Acceptance has no effect until it is communicated and there are well-tried and tested rules about communicating acceptance (ie the reception and postal rules). Basically, you need to do all you can to ensure that you have got your acceptance to the other party preferably in writing, for evidential reasons.
What happens when a contract has an illegal purpose or violates public policy?
As a general rule, a contract which is illegal will be unenforceable. The law on this is not simple and the courts have been considering issues regarding illegal contracts for years. If a claim is brought to enforce a contract, the courts can refuse the claim on the basis that it arises from illegal or immoral conduct without either party raising this as a defence.
Depending on the nature of the problem and how much of the contract is affected, in order to avoid the whole contract becoming unenforceable, if the offending part relates to public policy, it may be possible to sever that part of the contract and enforce the rest.
If the unenforceable provision can be removed without the need to add to or modify the remaining aspects, the remaining terms continue to be supported by adequate consideration (e.g. money) and the removal of the unenforceable provision does not materially change the character of the contract making it different to the contract entered into, then the remainder of the contract will continue and can be relied on.
What happens when there is a mistake in creating a contract?
This is another area that is not particularly straightforward. Generally, the parties are held to the terms of the contract they have made, regardless of whether they have misunderstood the contract wording, its legal effect, their rights or the commercial benefits of entering the agreement. It is each party’s responsibility to satisfy itself on all these points before agreeing to a contract.
In the absence of special circumstances, if a mistake has been made, the only option is to hope the counterparty will agree to amend or renegotiate the contract. However, there is no requirement on a party to do this, it is therefore always best to make sure you get the agreement right first time around.
If, however, one party misleads the other, the contract may be valid but voidable i.e. the injured party may set the contract aside if it acts quickly enough and they may also be able to bring a claim for damages.
In some cases, the courts will correct a mistake in a contract to bring its express terms in line with what they understand to have been the parties’ intentions.
In extreme cases, a mistake may prevent the formation of a valid contract i.e. the mistake may negate the agreement or render it too uncertain to enforce. Potentially, if none of the previous solutions apply and the right conditions are met, the contract may be void for mistake at common law.
The most important thing to remember if you are trying to get a contract set aside due to a mistake is that you need to act quickly. Delaying may mean that the right to set aside a voidable contract is lost. You can also lose this right by continuing to perform and demand performance under the contract.
What is a ‘retention of title’ (ROT) clause?
Essentially, this clause ensures that ownership of the goods is retained by the seller until it has received full payment for the goods. If you are looking to retain ownership (and for most sales that is the only security you get for payment) then you need to have a well-drafted clause in your contract.
The provisions which are needed to make the clause effective are as follows:
- the clause to be effective if any money is owed to the seller (i.e. an all monies clause); and
- rights for: the seller to repossess the goods, to prevent the buyer from selling or using the goods and to enter the buyer’s premises in order to repossess the goods.
You can also include an obligation on the buyer to: store the seller’s goods separately from goods belonging to third parties, mark them as the seller’s property and allow the seller access to the buyer’s premises to verify that this has been done. This will enable the seller to easily identify its own goods if repossession is necessary and avoid any mixing of, and therefore uncertainty over, ownership of the goods.
Of the above, the most important in practice is the all monies clause, i.e. the seller simply has to show that money is owed to them by way of unpaid invoices and they don’t have to identify which specific product hasn’t been paid for.
What is an ‘entire agreement’ clause?
An entire agreement clause is a clause that commonly appears in most contracts. The purpose of an entire agreement clause is to prevent statements or representations that are not within the contract or agreement from having any contractual force.
What is the difference between a ‘condition’ and a ‘warranty’?
A warranty is a promise within a contract. A breach of warranty may give rise to a claim for damages. A condition is a term of a contract and it is of vital importance, to the root of the contract. Therefore, it is a major term of the contract, and a breach of a condition will give the claimant the right to terminate the contract and claim damages for any loss.
What is the time limit for bringing a contractual claim?
The Limitation Act 1960 sets out the limitation periods for different types of claims, for bringing a contract claim it is six years and this begins from the date of the breach of contract.
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