Chapter 10 The Law of contract Flashcards
10.1 Introduction
The relevant legislation applying to sales of goods is the 1979 Sale of Goods Act 1979 and the Consumer Rights Act 2015. A contract for the sale of goods between businesses is a contract which meets the requirements of a seller transfers, the property in, goods, to the buyer for a money consideration called the price. The consideration must be money otherwise the contract is one of barter or exchange not a sale. It is the duty of the seller to deliver the item.
10.2 Nature of a contract
A contract is an agreement between two parties which is intended to give rise to legal relations. The essence of a contract is it is a bargain, signified by offer and acceptance and either supported by consideration or created in the form of a deed.
10.3 The Law of contract – tax context
CGT is charged on the disposal of an asset. The disposal may be impacted by the disponer (person making the disposal) entering into a contract for the sale of the goods. The disposal occurs at the time the contract is made and not when the asset is conveyed or transferred. This applies to any disposal of any asset under any type of contract.
10.4 The Making of a contract
Under English law for a contract to be made this must occur:
• Parties intend to create legal relations
• There is an agreement between the parties signified by an offer and acceptance
• The agreement is supported by consideration or is contained in a deed
Intention to create legally enforceable relations – no contract can exist in absence of this. The seller must intend to sell the goods and the buyer buy them. Some arrangements are not intended to be legally enforceable. The test is whether the parties had the intention to create legal relations. Commercial and business negotiations are presumed to be intended to create legal relations whereas social and domestic relations are not.
Agreement by offer and acceptance – the significance of the offer and the acceptance is that new terms cannot be introduced after both parties agree to them. The court will endeavor to discover the intention of the parties to establish the existence of a contract even if the terms are vague. If it cannot, there is no agreement and no contract.
Consideration or deed – the purpose of consideration is to put some legal limits on the enforceability of agreements. A gratuitous promise is binding only if made by deed. A deed is a written document, the making of which must observe certain formalities. Consideration is not required under Scots’ law.
Non-essential elements as regards formation – the form of a contract is not an essential element. Contracts do not have to be in writing unless sale of land and shares. The form of a contract does not have to be considered when making a contract. Any person with mental capacity can make a contract and a minor may make a contract. Capacity is not essential in formation of contracts; it is not always possible to force a minor to carry out a contract. A minor cannot buy land as they cannot give good receipt for it.
10.5 the offer
Making an offer - An offer is the expression of willingness to the contract. The contract becomes binding on them as soon as it is accepted. Only an offer made with the intention on part of the offeror shall becoming binding however. An offer must be communicated so it can be accepted or rejected and can be communicated either expressly (words or writing) or implication (by conduct). It is possible however to make an offer in any form.
Actions that are not offers – an offer must be distinguished from actions which fall short of an offer, such as:
• A supply of information: for instance, the mere statement of a price for something being sold in answer to an enquiry is not necessarily an offer to sell at that price
• A declaration of intent: if a person merely states an intention to sell a car for a specified price, this does not amount to an offer to sell it.
• An invitation to treat: invitation to others to make offers. It is an indication that the invitor is willing to enter into negotiations but not bound to accept.
Terminating an offer: An offer is terminated and can no longer be accepted in a number of circumstances:
• Rejection – refusal of an offer
• Counter offer – this forms a new offer capable of acceptance
• Revocation – offeror is free to revoke an offer at any time unless the offeree has been granted an option
• Lapse of time – if a precise period of time is not stipulated, then acceptance must be made within a reasonable time
• Failure of condition of precedent – an offer may be subject to a condition precedent, the failure of which terminates it automatically.
• Death – the death of the offeree or the offeror usually terminates the offer
10.6 Accepting the offer
Only the offeree can accept the offer while it is still in force. Usually, any expression constitutes acceptance if it is final and unqualified. Some people purport to accept an offer subject to contract, meaning the offeree is agreeable to the terms of the offer but proposes both parties should negotiate a formal contract on the basis of the offer. Neither party is bound until the formal contract is signed. Acceptance must be communicated to the offeror or their agent. Where postal system is used acceptance occurs when a letter is posted and not received. A revocation of an offer takes place when the letter is received. The postal rule only applies to letters and not electronic means of communication.
10.7 Conditional contracts
For CGT purposes if a contract is conditional, the disposal is made when the condition is satisfied. There are two types of conditional contracts – promissory conditions and contingent conditions.
Promissory conditions – obligation in a contract which one of the parties have the power to fulfil. Such conditions are terms of the contract and not conditions at all.
Contingent conditions – may either be a conditional precedent or a condition subsequent. A condition precedent exists where the event referred to by the parties to the would-be agreement is not within their power to bring about. The existence of a condition precedent suspends the existence of a contract until the occurrence of a specific event.
A condition subsequent provides that a previously binding contract is to come to an end of the occurrence of a specific event.
A conditional contract – any contract is conditional if its operation depends on an event which is not certain. For an agreement to be classed as conditional in the sense used in legislation it must contain a conditional precedence. Although the existence of a condition precedent suspends the existence of the main obligations, such contracts can still impose some degree of obligation on one or both of the parties to it. Typical obligations include:
• A restricted right to withdraw from the contract either until a specified time or until a reasonable time has elapsed or until there is no possibility that the condition precedent can satisfied
• A duty to prevent the occurrence of the conditional precedent
• A duty to make reasonable efforts to bring about the event
The mere suspension of the carrying out of an obligation does not preclude that obligation from being a current binding one.
10.8 The terms of a contract
General rules – terms of a contract are the matters both parties have agreed on, this is recognized by the principle of freedom of contract. The terms of a contract are different from the essential elements of a contract. The terms are a matter of fact and are things both parties agree on, the elements are the things that the law requires for the contract to exist. The terms of a contract cannot be interfered with subject to certain statutory regulations. The Taxes Act include provisions which may have the effect of altering the terms of a contract. In practice the degree to which parties may mutually agree the terms are limited by:
• The use of standard form contracts
• The presence of implied terms by virtue of statute
• The restriction of the effectiveness of certain terms because of statute
Standard form contracts – these terms are typically reproduced on the back of a printed order forms and it is normally up to the customer to review the standard form contract and then to take it or leave it.
Express and implied terms – express terms are explicitly agreed by the parties, other terms may also be implied into the contract.
Retention of title clauses – some contracts provide that the seller continues to be the legal owner of the goods with ownership passing when the goods are paid for. This type of term is a retention of title clause. The purpose is to provide the seller with some security for payment and to guard against the buyer’s insolvency.
Variation of the terms of a contract – the terms may be varied by agreement between the parties. The parties create a new contract which also mut satisfy the elements of a contract. A contract cannot be varied unilaterally (by one party) unless one of the parties reserved such a right in the original contract.
10.9 The Effect of a contract
This is the outcome which the contract is designed to achieve. For a sale of goods the effect is subject to the terms of the contract and the transfer of the ownership of goods. The desired effect can be important for tax purposes.
10.10 Assignment of rights and novation of duties
Assignment of rights – a party can transfer the rights of benefits of a contract to another person, this is the assignment of contract. Most contractual rights can be assigned, unless otherwise agreed. When rights are transferred to a third party, the third party is entitled to enforce the rights against the other original party in the contract. In circumstances as death or bankruptcy of a party, the law automatically transfers their rights to their personal representative or trustee in bankruptcy. This is transfer by operation of law.
Novation – a party cannot transfer the duties and obligations of a contract to a third party without the consent of the other party. If the party agrees then a separate contract, known as novation must be entered into.
If novation isn’t agreed, a contract may arrange to have its obligations discharged by a sub-contractor. The original party remains liable for the defaults of the sub-contractor. A party will not be able to sub-contract if they have agreed with another party an obligation of personal performance. Where a sub-contractor is engaged, there is no transfer by the party of its obligations.
10.11 Vitiating factors in contract
A number of factors can make a contract invalid. A void contract is treated as if it had never been formed and is unenforceable by either party at any time. A voidable contract is valid and enforceable unless the innocent party chooses to cancel the contract, making it void. The main factors that vitiate or invalidate a contract include the contract being illegal or contrary to public policy, mistake or misrepresentation when the contract was formed and the exercise of duress or undue influence when the contract was formed.
Illegal/contrary to public policy contracts – certain contracts are illegal by statute or at common law. Some are contrary to public policy and void. The general rule is that clauses in restraint of trade are anti-competitive hence contrary to public policy and void. In employment contracts any term restricting an employee from activities after employment may be void. Where an employee is paid money for agreeing to restraints of trade clauses, the sum is liable to income tax and national insurance regardless of whether the contract is void. Some clauses in restraint of trade in commercial contracts are valid. It may be enforceable if the person attempting to rely on it proves it is reasonable because:
• It is imposed to protect a legitimate interest of a party to the contract
• It is a reasonable safeguard of that interest, or
• It is reasonable in the interest of the public
Mistake – a fundamental mistake that was unknown to the parties, nullifies the contract and renders it void. Rectification may be possible where due to the mistake, a contract records the parties’ agreement incorrectly.
Misrepresentation – this occurs when one party makes a false statement of fact to induce another party to enter into a contract, with them knowing the statement was false. Where there is misrepresentation the innocent party may avoid the contract and alternatively claim damages.
Duress and undue influence – this makes the contract voidable at the option of the coerced or influenced party, because that person does not freely consent to the arrangements made.
10.12 Discharge of a contract
Once a contract serves the intended purpose the contract has run its course and ceases to exist. When the parties have no obligations outstanding under the contract it is discharged. A contract can be discharged lawfully:
• By performance or completion
• Mutually by agreement
• By frustration that is where the contract can no longer be carried out because of circumstances beyond the control of the parties
A contract is discharged unlawfully when one of the parties have reneged on their duties. The party at fault is said to have breached the contract.
Discharge by performance – a contract imposes obligations on the parties from which they may discharged in various ways. The most obvious is when a party has performed what is required of them and has no more obligations. This occurs once both parties have achieved this.
Discharge by agreement – the agreement may be reached by the parties entering into a separate contract to the one they originally made. Under the new contract the parties agree to put an end to their original contract. The parties may discharge by way of condition subsequent.
Discharge by frustration – this occurs where it is established that due to a subsequent change in circumstances, a contract has become impossible to perform. The parties are excused from performing their duties. This does not occur when it is more difficult or expensive to perform.
Discharge for breach of contract – if one party intentionally fails to carry out their obligations, they commit a breach. This does not itself discharge a contract; the innocent party decides that. If they decide to do so, this cannot be retracted and the termination does not operate retrospectively. Actual breach occurs where a party fails with its obligations. Anticipatory breach occurs where one party repudiates the contract, they refuse to carry out their obligations under the contract before the time fixed for performance.
10.13 Remedies for breach of contract
Where a contract is discharged by breach, the innocent party is entitled to remedies against the party that has failed to carry out their obligations. The primary remedies are damages and specific performance.
Damages – aim of this is to put the injured party into the position they would have been if the contract was properly performed. Damages are compensatory not punitive. An innocent party is under a duty to mitigate their loss. They must take reasonable steps to limit the damage caused, the court will award a reduced level of damages if they fail to do this. Damages are of two types:
• Liquidated damages – the amount set by both parties as a term of the contract. They stipulate the sum paid should the contract be breached. If this represents a fair estimate of the likely loss suffered it will be enforced, otherwise the sum will be classed as a penalty and not enforced.
• Unliquidated damages – the amount of loss to the innocent party that is worked out by a court following the time of the breach of the contract.
Specific performance – this is an equitable remedy where the court orders the party in breach of the contract to carry out their duties. The order is the court’s discretion. Specific performance is only awarded where it is just and equitable to do so.
This is awarded where damages are not an adequate remedy, often awarded in the case of a contract for the sale of land, on the basis each piece of land is unique. It is never awarded in a contract for personal services, such as an employment contract as it is contrary to public policy to compel an unwilling party to maintain personal relations with another.
