At Ison Harrison Solicitors, we often get asked whether a contract is binding, or what is necessary to make a contract binding. Whilst each contract needs to be considered on its own basis, this article will provide a high-level overview of matters to consider when determined what makes a contract enforceable.
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Consideration
The underlying principle of contract law is that each party must give ‘consideration’. Legally what this means is that each party must bring something to the contract. Ordinarily this will involve one party providing a product or service and another party paying for that product or service. However a contract is valid provided that both parties are obliged to positively do something.
In a joint venture agreement, for example, it may be that both parties are obliged to provide specific goods or services for a common purpose. The point being that a contract may not be valid if one party is not positively obliged to provide ‘consideration’, except where the document is executed as a ‘Deed’.
An example of where this can be agreed can be where Party A agrees to supply Party B with a product for which Party B will pay a sum of money for the product to Party A. This would be a valid contract however if Party A subsequently agrees to provide further products to Party B for which Party B is not obliged to make a further payment, then the supply of these further products may not be a contractual obligation.
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Does a Contract have to be in writing?
A question often asked is whether a contract has to be in writing. Ordinarily, a contract does not have to be in writing providing the legal requirements, such as ‘Consideration’ mentioned above, are met.
There are certain types of contract which must be in writing but for many general commercial arrangements, a contract be made verbally provided each party has an intention to create legal relations, the terms are sufficiently certain and each party gives Consideration.
It is however advisable to have contracts in writing to give certainty as to the terms agreed. The difficulty often with verbal agreements is that the parties can dispute what was actually agreed or intended which can lead to costly disputes.
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Entire Agreement Clauses
Situations can arise whereby parties enter into a written agreement but then verbally agree amendments or additional provisions which are not documented in writing. This could create a situation whereby the parties have both the written agreement and a separate ‘collateral agreement’ reflecting the separate terms agreed verbally, provided this separate verbal agreement adheres to the underlying legal principles for contract formation.
One key protection a party ought to consider is having an ‘Entire Agreement’ clause. This is a clause entered into a written agreement stating that the written agreement reflects all of the terms agreed between the parties and neither party can then rely on separate representations or collateral agreements they allege have been created.
If a written document does not have an ‘Entire Agreement’ clause then it would be open to the Court, on a dispute, to infer that verbally terms are also incorporated or implied into the written agreement.
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Certainty Of Terms
An important principle for any contract is that there must be certainty of terms and that the parties must be aligned as to their intention on the terms. The Court will expect the parties to demonstrate a ‘meeting of minds’.
For example, a contract may not existing if one party believes that they are to supply a certain product for a defined price and the other party believes that the product to be supplied is a different product, even if that product is substantially the same, for that price. The parties would not have commonality of purpose and so a contract may not legally existed.
As above, these issues can be resolved if the contract is set out clearly in writing.
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Mistake
Situations can arise whereby the parties enter into a contract which includes a mistake. For example, the parties may execute the wrong version of a contract or the contract may include crucial typographical errors.
What would happen for example if a contract mistaken said the price as £1,000 instead of £10,000?
The law on Mistake in contract is complex. The Courts will often look to the parties intentions. If one party has deliberately misled another or a party knowingly enters into a contract where they know another party has made a mistake then it may be that the contract is void so that no contract exists.
It may be that an agreement needs to be amended or replaced with a replacement agreement or deed of variation.
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Implied Terms
Certain contracts are subject to implied terms by virtue of statutory legislation. This means that regardless of what is documented in a written contract or agreed a verbally, certain contracts are always subject to certain legal provisions.
Legislation such as the Consumer Rights Act 2015, Supply of Goods and Services Act 1982 and Sale of Goods Act 1979 all imply terms in certain types of contracts. This is particularly relevant where contracts are with consumers as consumers will be afforded a greater degree of protection.
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Unfair Terms
Generally, consumers are given greater protection from unfair terms than would be provided in a business-to-business agreement. The assumption in law is that consumers do not have the same degree of bargaining power as businesses would if they were negotiating with other businesses.
Consumers can be protected from unfair terms in legislations such as the Consumer Rights Act 2015 or the Consumer Credit Act 1974.
Businesses will have less protection but still have a degree of protection from unfair terms in accordance with the Unfair Contract Terms Act 1977. Clauses which are clearly intended as penalty clauses, such as grossly unfair interest clauses, may not be enforceable.
Summary
There are a number of factors which will determine whether a contract is, or is not, enforceable. In many situations, particularly for businesses, it can be advisable to take independent legal advice before entering into contracts, particularly where the contract is of significant value to the businesses either in terms of financial value or material importance to the business.
For further advice, please contact us on 0113 284 5000 or fill in our enquiry form.
