Any agreement between parties can be a valid contract. Such agreements can be written or oral (a contract in writing has the obvious evidentiary advantage) and may involve goods, services, money, employment contracts, and real estate deals. The law governing this area is contract law which derives mainly from the common law. Normally a party signing a written contract is bound by its terms, whether or not he / she has read them. As such, under Contract law, those long terms and conditions on websites would still apply to you after you click “I agree”, whether you have read them or not.
Contracts can be oral, partly oral and partly written or written, and can be made informally. However, some legislations do impose requirements for contracts to be in writing or in a particular form. These include contracts for the sale or other disposition of an interest in land, some consumer credit agreements and some requirements relating to employees.
There are four essential elements of a valid contract: offer, acceptance, consideration and intention to create legal relations. Please refer to the Article “4 Essentials of a Valid Contract and Privity of Contract”:
Normally, a contract cannot confer rights or impose obligations that arise under the contract on anyone other than one of the parties to the contract. For more details, please also refer to the article above on "4 Essentials of a Valid Contract and Privity of Contract”.
The most obvious terms are those that the parties have expressly set out in their agreement. The parties may record their agreement, and hence the terms of their contract, in more than one document. There is no duty on parties to negotiations to negotiate in good faith. This means that the parties can negotiate / bargain as hard as possible, so long as it does not constitute fraud or misrepresentation (please see below) and a one sided agreement does not necessarily makes the contract invalid. The terms may be incorporated by reference into the contract; (for example, where a contract is made subject to standard terms of sale). Once the express terms have been identified, there is the question of interpretation.
The document setting out the parties' agreement must be interpreted objectively: it is a question of what a reasonable person in the position of the parties would have understood the words to mean. The starting point is that words are to be given their ordinary and natural meaning, but technical words are usually given their technical meaning. Commercial contracts are construed in a business fashion. Certain words have a statutory meaning - month, person, the singular includes the plural and the masculine includes the feminine.
If the wording of an instrument is ambiguous, then it is construed more strongly against the person who drafted the provision or for whose benefit the provision was drafted. This is particularly relevant in guarantees, exclusion clauses and indemnities. There may also be an express reference to a person or something particular to show an intention to exclude everything else. That is why many agreements have a definition and interpretation section to cater for any special usage of words.
Some terms are not expressly stated but are implied, which are known as implied terms. Normally these terms are fairly obvious to both parties to the contract, or the parties intended not to expressly write it, or by operation of law, or by custom or usage. The law will imply terms in a contract in some cases. For example where it is necessary to give efficacy to the contract; and where it is obvious from the contract that the parties would, as reasonable men, have agreed to it if it had been suggested when the contract was made. In the context of an employment contract, implied terms may include things like the right to equal pay, not to be discriminated against or a certain duty of care.
Terms implied in law are terms imported by operation of law, whether the parties intended to include them or not. For example, in a contract for the sale of goods, it is an implied term that the goods will be of a certain quality and, if sold for a particular purpose, will be fit for that purpose. Further significant terms may be implied from the nature of the relationship between the parties – for example, contracts for professional services require the professional to act with reasonable standards of competence.
A misrepresentation is an untrue or misleading statement of fact made during negotiations by one party to another, the statement then inducing that other party into the contract. There are three categories of misrepresentation:
A person can always rescind for a fraudulent misrepresentation. If the misrepresentation is negligent or wholly innocent, the court has a discretion to refuse to allow the person to whom the misrepresentation was made to rescind the contract but to award him damages instead. It used to be the case that if someone was induced to enter a contract by a misrepresentation, he could rescind the contract subject to certain conditions but could only claim damages if the misrepresentation was fraudulent.
The misrepresentation can be a misstatement of a fact. In some cases, for example if a representation is made about an opinion or intention which is not honestly held, a statement of opinion or intention can also be actionable. The general rule is that mere non-disclosure is not a misrepresentation as there is generally no duty on a party to a contract to disclose material facts to the other party. If a statement which is true when made subsequently becomes untrue, a failure to notify the change can itself be a misrepresentation in some cases.
The law on misrepresentation is a complex mixture of the rules of common law, equity and statute law. It may be possible to bring an action in tort for a misrepresentation, as well as in contract which can lead to the amount of damages awarded being different. To obtain relief, a person must be able to show that the misrepresentation was made to him or his agent, or that the person making it expected it to be passed on or made it to the public at large. The person must also show that he relied on it or was affected by it. The main remedies for misrepresentation are damages or rescission.
– The contract will stand but the claimant would be entitled to damages as a remedy in the form of a monetary award as compensation for the loss arising from the misrepresentation. The amount of damages for fraudulent misrepresentation differs from the normal damages for breach of contract. Damages for negligent misrepresentation can be reduced if the person claiming was contributorily negligent.
– Rescission means that the parties can rescind or cancel the contract. This means that the parties would go back to the original position as if the contract was never entered into. Rescission may not be awarded (i) if it is not possible to put the parties back to their original positions, (ii) if the party has affirmed the contract, (iii) because of lapse of time or (iv) because a third party has acquired rights.
Mistake can occur where there is an erroneous belief at the time of contracting, that certain facts are true. Common law has identified three different types of mistake in contract:
– A unilateral mistake is a mistake made by one party – e.g. the party has not fully considered the circumstances when making the contract. Normally, a unilateral mistake does not render a contract void. The common law principle of Caveat Emptor (Buyers beware) governs when a party enters into a contract. However, a party shall not take advantage of the other party if it is a clear clerical mistake, or 'snatch up' a bargain that one did not intend to make, resulting from arithmetic error etc. This will be seen by an objective standard, or if a reasonable person would be able to know that the mistake would not make sense to one of the parties. The court may also not uphold a contract if the unilateral mistake makes it unconscionable.
– A mutual mistake occurs when the parties to a contract have the same erroneous beliefs about the same material fact within their contract. There is a meeting of the minds (at cross-purposes) and both parties are mistaken, making the contract is voidable. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract. For a mutual mistake to be void, then the item the parties are mistaken about must be material.
- A common mistake is where both parties hold the same mistaken belief of the facts at the time of entering into the contract. The distinction between the 'common mistake' and the 'mutual mistake' is important. In the case of a common mistake, an agreement can be set aside from the beginning if there is a mistake relating to a fundamental assumption as to the existence or identity of the subject matter.
- If the effect of a mistake is that misunderstanding in the communications between the parties which prevents there being an effective agreement, then the contract would rendered void Ab Initio (i.e. there was never any contract between the parties).
- However where, at common law, the court would decide that the mistake was not enough to make the contract void ab initio (does not go to the heart of the contract), then it may then consider whether to make the contract “voidable”. A voidable contract is originally considered to be legal and enforceable but the party who made the mistake has the opportunity to reject the contract after the fact. If a party with the power to reject the contract chooses not to reject the contract despite the defect, the contract remains valid and enforceable. The court may also consider other grounds exist for relief or remedy in equity.
Where a contract which has been entered into under duress, the party subject to the duress can choose not to be bound by the contract provided he has not affirmed or ratified the contract. The same applies if a contract has been entered into under undue influence - if one party has abused his influence over the other or betrayed a position of confidence. Equitable relief may also be granted for unconscionable bargains or where there was inequality of bargaining power. These do not normally apply to commercial transactions.
Once you have negotiated and agreed on the terms of a contract with your counterparty, here are some tips to ensure that it is valid and enforceable:
1. Check the terms to ensure that they are clear, unambiguous and without any mistakes, include specific definitions for any technical terms if necessary.
2. Clarify any unclear issues with your counterparty to avoid claims of misrepresentation, mistake, duress or undue influence, thereby rendering the contract void or voidable.
3. Ensure that the four essential elements of a valid contract: offer, acceptance, consideration and intention to create legal relations have been included in the contract.
4. Although a contract can be verbal, a contract in writing is always better evidence to show what the parties have agreed upon. Where possible, include more expressed terms than implied terms.
5. Once the parties are in agreement that the contract is final, they should sign and date the contract, preferably simultaneously. You may inadvertently be giving some optionality away by signing first without having your counterparty sign shortly after. All parties should keep a copy of the contract for reference.
Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your local lawyer.