Sunday, November 30, 2014

Law of Contract – Part 2 - How a contract is formed - Construction & Built Environment

As long as all of the relevant elements are in place a verbal contract can become legally binding in just the same manner as a written contract. Of course trying to prove that a verbal contract exists is far more difficult that a written contract by the very nature of no written evidence

Within the law of contract the term ‘legally binding’ is actually very significant as it means that a relationship has now been formed which brings with it obligations. The point at which a contract becomes ‘formed’ and legally binding is therefore crucial to understand so that those involved do not inadvertently bind themselves to obligations without realising.  You may think to yourself that anybody should be aware of whether they have entered into a contract or not, however if you do some research it will not take you long to discover that a vast amount of disputes relate to whether a contract exists or has been formed in the first place. So this begs the question, ‘at what point is a contract formed and becomes legally binding?’

Firstly, it is worth being aware that most contracts take a written form however it is also possible to form a contract verbally.  As long as all of the relevant 'ingredients' are in place (which will be discussed below) a verbal contract can become legally binding in just the same manner as a written contract. Of course trying to prove that a verbal contract exists is far more difficult that a written contract by the very nature of no written evidence.  You may have heard the term ‘a verbal contract is not worth the paper it is written on’, which really demonstrates the difficulty that will be encountered for anyone who wants to take any form of action on the basis of a verbal contract.  Other evidence such as recordings may be used however there is no substitute for a written contract in the event of a disagreement or a dispute (although written contracts can often be poorly drafted, resulting in disagreement in interpretation).   

In order to form a legally binding contract there are four elements necessary.  These are; Agreement (which consists of both an offer and an acceptance), Consideration (something of value, which is not necessarily financial), an Intention to create legal relations and a Legal capacity to make the contract.

As detailed above the first ingredient ‘agreement’, requires both an offer and an acceptance, and unless both are in place then there obviously cannot be an agreement, and therefore no contract. There is now well established precedent for what constitutes an offer, how an offer is made, how the offer is communicated etc. In terms of what constitutes an offer it is worth briefly exploring the distinction between an offer and something referred to as ‘an invitation to treat’. If we take an item displayed in a shop window or goods displayed in a supermarket as an example, then at what point is an offer being made?  It clearly would be inappropriate if it were possible to create a binding contract by a shop keeper or a supermarket displaying goods.  The display of goods with a price ticket attached in a shop window or on a supermarket shelf is not an offer to sell but an invitation for customers ‘treat themselves’ or to make an offer to buy.  When the item is taken to the checkout and money is exchanged (this is consideration which is another of the ingredients required to form a binding contract), this then has all of the ingredients necessary and a binding contract is formed at this point.

There a number of examples which demonstrate the distinction between an offer and an invitation to treat within case law, none more so than Fisher v Bell (1961). This case relates to the display of a flick knife in a shop window.  The wording of  the Restriction  of  Offensive  Weapons  Act  1959,  section 1(1), stated: ‘it was illegal to manufacture, sell, hire, or offer for sale or hire, or lend  to  any other person, amongst other things, any knife which has a blade which opens automatically by hand pressure……..’ The shopkeeper argued that he was not offering the flick knife for sale by displaying it in his window, merely inviting people to treat themselves. The court found in favour of the shopkeeper who was therefore deemed not guilty of the offence. An Invitation to treat leaves both parties free to change their minds, so a shopkeeper can decide to refuse to sell to a customer who he does not want to (for example, somebody who is under age or drunk). Also, a customer who puts something into their basket has the option to put it back or change their mind before proceeding to the checkout

Think also about auctions.  At what point in an auction is an offer made?  The auctioneer’s call for bids is and invitation to treat, which is a call for offers.  Bids that are then made are offers which the auctioneer is at liberty to accept or reject at any time, before the hammer goes down.  Likewise, a bidder is at liberty to withdraw their offer at any time before the hammer goes down.  We do not see this happening very often because it is likely that most people are not aware of this, however, if you make a bid and for some reason change your mind you do not need to sit silently and hope and pray that somebody else puts in a higher bid.  As long as you communicate your withdrawal clearly so that this is heard by the auctioneer and acknowledged, before the hammer goes down then that will effectively withdraw your offer, Payne v Cave (1789) demonstrates this well. The point at which the auctioneer’s hammer goes down is the point at which a binding contract is made, because there is an offer (from the bidder), an acceptance (from the auctioneer) and consideration (the sum of money agreed). An auction transaction will general assume an intention to create legal relations and as long as both parties have a legal capacity to make the contract, then a binding contract is formed.

Law of contract is a well developed area of UK law which has evolved over many hundreds of years. Therefore, there is no shortage of case law to refer back to in respect of both the formation of contracts as well how a contract may be brought to an end.  There are also many books and other literature that are available on the subject which discuss contract law in great detail.  In such a short article I can only really scratch the surface of this area of law and provide an introduction to the subject however, it is well worth researching contract law in more detail to help develop a greater understanding.  I always tell my students that the most effective way of understanding the main principles of any area of law, in addition to reading the legislation and/or previous cases themselves, is to refer to the details and decisions of these previous cases.  Whereas some of the legal principles may seem at first to be rather complicated and confusing, they often become much clearer when the details of the case and the rationale for the decision are understood.

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