1€¦ · Web viewThey can be verbal where two people agree through the spoken word to be bound....

1. Be able to apply the requirements for a valid contract

Definition of contractA business contract is an agreement or set of promises enforceable by law made between two or more persons or businesses. There must be an intention to create a legally binding agreement between the parties and they must intend to give something of value as consideration to add worth to the contract.

Types of contractA contract can exist in many different ways:

They can be verbal where two people agree through the spoken word to be bound.

They can be written where the details of the contract are included in a document signed by each person. (Some contracts must be in writing such as contracts for the sale of land, consumer credit and employment.)

Verbal and written contractsNot every business transaction will require a contract, but it is important that you can recognise when a contract is needed and when it is not. It is just as important, however, to recognise the need for a written or verbal contract. Consider why certain contracts can be quite informal whilst others require formal procedures to be in place.

activitiesVerbal or written contracts?

Consider the examples in the table below and decide whether or not a contract is required, what type of contract is required, and the reasons for your answers.

© Pearson Education Ltd 2009 BTEC in a Box National Business Unit 21 page 1 of 54

Type of activity

Contract requiredYes/No

Type of contractVerbal/written

Reason

Employing a new member of

staff

Selling a car on credit

Borrowing £10 from your parents

Selling a car privately

Applying for a credit card

Borrowing £1000 from a friend and agreeing to pay back £1100

Buying and selling a house

Standard form contractsBusinesses may choose to use their own standard form contracts. These forms contain terms that amount to ready-made contracts that suit individual business needs.


points for discussionThe problems with standard form contracts

Discuss the problems associated with standard form contracts in business. Issues that might be considered are as follows:

They are one-sided and obviously favour the party writing them.

Non-business parties may not understand the term. They should be written in plain English.

Terms written should be ‘fair and reasonable’ and standard form contracts may struggle with this.

Over-reliance on pre-written contracts means that businesses lose the skill of negotiation.

Offers Business contracts will consist of a series of offers and acceptances. An offer is a promise from one of the parties made with the idea that it shall become legally enforceable upon the person making it as soon as it is accepted by the person receiving it.

Invitation to treatMany statements that appear to be offers are not binding and are in fact invitations to treat. These are statements showing an indication that a person is prepared to receive offers from another person. These can be accepted or rejected until the final moment of acceptance. Examples are:

The display of goods with a price ticket attached in a shop window or supermarket.

Products displayed in advertisements, catalogues, brochures and the Internet.

The value of shares of a business issued in the Company Prospectus.


points for discussionInvitation to treat- the contractual positionThere have been many examples of mistakes being made by businesses about the price of their products. In 2003 the online retailer Amazon gave details on its website of a HP pocket computer on sale for £7! It was on the US Amazon website for $299 so it looked like a real bargain. The site was flooded with consumers buying in bulk. The site was closed and Amazon said the price was a mistake and that they would not honour any of the orders placed. They said that no contract had been formed and that a contract was only in existence when they send the consumer an e-mail saying their goods had been sent.

What important contractual issue does this raise? Why were Amazon able to get out of honouring the contracts? From a business point of view were Amazon correct to do this?

Counter-offerOffers should be accepted in exactly the same way as they are offered. If they are accepted differently the acceptance forms a counter-offer which can invalidate the original offer.

Communication of offerAn offer must be communicated to the other party so that they can accept it. It has to be certain and not too vague so that the person accepting it knows what they are agreeing to.

AcceptanceFor a contract to exist, a valid offer (made by the offeror) must be accepted by the other side (the offeree). Several important factors should be considered when looking at acceptance. Acceptance must be communicated to the person making the offer, so that silence to an offer will not be acceptance of that offer. Acceptance must be in


the form (if any) specified in the offer. If the offer is silent as to the method of acceptance, then only written or oral acceptance will be allowed. Acceptance does not have to be in the specified form laid down in the offer provided the method of acceptance used satisfies the offer. Acceptance of an offer must be without condition. The effect of a change in acceptance will have the effect of cancelling the original offer.

Acceptance by post is an exception to the above rule that acceptance must be communicated to the person making the offer. The so called ‘postal acceptance rules’ state that acceptance is considered to be effective as soon as a correctly addressed, stamped envelope is posted in a letter-box.

The Battle of the FormsLegal difficulties have arisen in business law when companies deal with one another using standard form contracts, as businesses may make an offer and acceptance on their own forms. These standard form contracts often contain terms that conflict with the other side’s contract. These disputes are known as ‘The Battle of the Forms’. Unfortunately, often if a dispute arises, the only way to resolve the dispute is by going to court.

activitiesThe Battle of the FormsBell Computers had been supplying computers to the local council for many years. They offered to supply computers to the council for £173,000. The quotation included a term in a standard form contract called a variation clause that would allow the sellers to increase the price of the quotation. The council defendants accepted the offer on their own standard form contract that did not allow such a price variation. An agreement was made, and on delivery Bell had increased the delivery price to £200,000 because of transport costs and a weak exchange rate. The council is refusing to pay the extra money.

What issues does this problem raise? Can you argue a business case for Bell increasing their prices?


How would you settle the dispute?

ConsiderationFor a valid contract there must be some form of consideration between the parties.

Consideration is defined as something given, promised or done in exchange by each party to the agreement. It simply adds value to the set of promises in the contract.

Consideration can exist in two ways: Executed consideration where an act is completed in

exchange for a promise such as a reward case. Executory consideration where the promise is yet to be

fulfilled. Most business contracts begin in this way; for example, the promise of a seller to deliver to a buyer is consideration for the buyer's promise to buy at the agreed price on completion.

There are various rules of consideration that have to be considered: Consideration can never be past, so that something already

completed by a party can never be deemed to be consideration for a promise later made by the other party.

Consideration must not be illegal; a contract will not be valid if the consideration involved is illegal or considered immoral.

In all valid contracts consideration must have some value, but there is no requirement for that consideration to be adequate, it should be merely sufficient. The value of consideration is agreed by the parties and the court will not help parties who agree consideration and then complain of making a ‘bad bargain’.


activitiesAdequate or sufficient considerationThe rule that consideration need not be adequate but must be sufficient means that things that might be considered inappropriate might be classed as consideration on a contract. Look at the following scenarios and discuss in groups whether you think sufficient value has been placed on the consideration in the contract.

Activity Adequate or sufficient consideration?

Collecting 1p vouchers from sweet wrappers in exchange for free music downloads

Using a new slimming drink for the prescribed amount of time and losing weight to claim a slimming prize being offered by the company

Looking for a lost cat to try to claim a reward for finding it

Spending five hours of your time as a finance broker trying to find a business loan for your client


points for discussionContracts – a personal view

Consider situations when you may have entered into a contract recently. It might have been buying a sandwich from your centre shop, buying a new MP3 player or booking a holiday with friends. Whatever the situation, you will have formed a contract. List the key contractual points in the table below.

Scenario How was the offer made?

How was the offer accepted?

What consideration was given?

Did both parties have capacity?

The Contracts (Rights of Third Parties) Act 1999This Act creates the law that allows third parties to have rights in a contract that affects them.

To gain rights under the Act, the third party must be clearly identified by name, class or description, and all remedies will be available to a third party as if he was a party to the original contract made between the original parties.


Capacity as applied to business situations A person or business must have legal capacity (or power) to enter into an agreement. This is vital if a contract is to be created. There are certain groups that only have limited capacity to enter into legal agreements.MinorsLegal rules have been developed to protect minors (those under 18) from contractual liability and to allow them to also enter into agreements in limited circumstances. Generally, there are two types of contract that will bind a minor when dealing with adults or businesses: contracts for the supply of necessary goods and services and beneficial contracts of service.

points for discussionThe problem of minors entering into a contract

Try to think of examples when minors might be able to enter into valid business contracts. Why are minors excluded from making business contracts? How can they get round this problem? For example, they might be able to get somebody to stand as guarantor for them on the contract.

Incapacitated personsIncapacitated persons cannot enter into a valid contract as they do not have sufficient mental capacity to understand what they are doing.

Organisations have varying capacity depending on the type of organisation.Registered companiesCompanies are created by registration under the Companies Act 1985 (as amended).


The company in law has a legal identity of its own and can sue and be sued on contracts made in its name. The company's power or capacity to contract is limited and defined in the Objects Clause of its Memorandum of


Association. Companies cannot form contracts before they are legally created.Unincorporated associationsThese are groups of people joined together in a common interest such as a sporting, social or political group. These groups are not considered legal bodies and capacity to contract belongs to members personally or jointly and not with the group. The group cannot make contracts in its name.PartnershipsPartnerships are governed by the Partnership Act 1890. Under this Act each partner has capacity to contract on behalf of all the partners, and therefore each is liable jointly on any contract entered into on behalf of the partnership.

activitiesAcceptable contractsConsider whether it is acceptable for your business to make a contract with the following people:

John is 17, learning to drive and wants to buy a sports car using car finance.

Alan, who has a severe mental illness and is in a secure hospital, wants to buy a shotgun from you.

A company is about to be set up, but before it is registered they order a supply of office equipment from you.

A local amateur dramatic society has entered into a contract with you to provide lighting at their theatre.

The senior partner in a firm of solicitors has ordered 12 new computers from you.


2. Factors which invalidate or vitiate a contractA binding agreement between two or more parties will form a valid contract. A binding contract will only be formed when there is consent between the parties and the agreement is genuine. There are a number of factors that will invalidate or vitiate (corrupt) an agreement.

MisrepresentationBefore business contracts are made, there may be a series of negotiations or talks between the parties. These talks will be a series of representations forming the agreement that is the basis of the contract. If these representations are in fact wrong or they are misrepresentations, then the contract may be in doubt.

A misrepresentation is a false declaration of fact made by one party to the other before the contract is made and is aimed at attracting or inducing the other to agree to the contract.

A misrepresentation is a positive statement made by a party. There is, however, no legal duty to disclose facts, and silence will not normally amount to a misrepresentation unless the contract is made in good faith where one party alone is in the possession of all the facts that form the basis of the contract. Here there is a legal duty to disclose relevant information.

There are different types of misrepresentation (meaning that the contract has not been created and can be declared void):

Legal misrepresentation where one person represents by words or other means something that is not correct according to the facts that the circumstances provide.

Fraudulent misrepresentation where a party makes a statement which they know to be false with the purpose of deceiving.

Negligent misrepresentation where the party makes a false statement without any reasonable ground for believing the statement’s truth.


Innocent misrepresentation where a party makes a statement believing it to be true, but finding that it was false after the contract had been completed.


activitiesHow can misrepresentation occur?Match the correct type of misrepresentation to the facts.

A car seller claims a car’s mileage is genuine, but knows it has been altered.

A claim that an anti-ageing cream will reduce your age by 10 years with no scientific evidence to back up the claim.

A solicitor gives advice which is wrong, causing a client to lose money.

A person sells a mobile phone they own, unaware that it is in fact stolen.

A business advertises a Christmas theme park on its website showing winter scenes, snow and reindeer, and when visitors arrive it is nothing like the description on the website.

A holiday company advertises a hotel unaware that the hotel next door has been demolished and the hotel now resembles a building site.

MistakeMistake as to the agreement will not affect the legal status of the contract as there is a common law principle called 'caveat emptor' or 'let the buyer beware'. This means that it is up to the parties to check the contract and to accept it even where there had been a mistake. There are situations where mistake will make a contract invalid. These include:

Where the parties make a mistake about the subject matter of the contract.

Where there is a mistake as to the identity of the parties. Where a legal document has been signed in error.


activitiesExamples of mistakeThere may well be instances where a contract may be void or voidable due to mistake. Look at the following examples and decide where the mistake might exist.

A land company makes a contract to sell ‘land in Wales’.

A contract to buy furniture from John Lewis - it is not the national company, but John Lewis, a sole trader.

A contract to supply 200 20m pipes is misheard and reads 20 200ml pipes.

A contract to supply 5,000 television sets from China is being drawn up. The TVs are to be placed on a ship and sent to the purchaser. Before the contract is completed, the ship and the TVs sink in the port.

DuressParties to a contract must be able to enter into a contract freely. If one of the parties has been forced into the contract against their will, the contract may be invalid. In such circumstances the affected party can avoid the contract on the grounds of duress.

Undue influenceWhen one side has an over-dominant position over the other in the contract, the law might say that the contract can be avoided due to undue influence - the stronger party may have exercised their dominance in forcing the other side to enter into the contract.


points for discussionCase study on duress in contractsSarah sets up a florist shop called ‘The Sweet Smell of Success’ aimed at providing high class floral bouquets to businesses and conference facilities. As with many businesses, she starts reasonably well, but as a result of other firms struggling, her floristry business begins to suffer. She is unable to pay the rent on her shop and asks the bank to increase her business loan. The bank initially agrees, but Sarah is unable to pay and the bank threatens to foreclose on her loan which means she will lose her business. Desperate, Sarah turns to a money-lender who normally offers money at a 2005 rate ofinterest. After Sarah explains her situation to him, he tells her that he can help her but the interest rate for this loan is 500%. Reluctantly, Sarah takes the money, but is immediately unable to pay and the money-lender takes Sarah to court.

Advise Sarah as to her legal position regarding this contract with the money-lender.

What might happen if the case goes to court?


3. Understand the impact of statutory consumer protection on the parties to a contract

Types of terms in a contractThe contract is a set of promises and agreements and each party to the contract expects certain things to happen. The contract itself is made up of a series of terms and clauses highlighting exactly what is expected, and it is important to understand the different types of terms in a contract.

Express termsThese are very important terms in a contract. They are the statements actually made by the parties and these terms will form the essential part of the contract. The parties will be forced to stick to these terms under the contract. Express terms are either conditions (a term of the contract which is the essential part of the agreement) or warranties (a less important term which is less vital for the performance of the contract).

Conditions in a contract are the very essence of the contract. They are the essential part of the contract without which the contract would be meaningless. Warranties, on the other hand, are still important parts of the contract, but not quite so vital if they are not stuck to. For example, if you book a holiday to Greece and your ticket comes back saying you are going to Canada, that is a breach of a condition and the contract is at an end. However, if the ticket comes back saying you are going to Greece but six hours later than you agreed, that would be a breach of warranty and the contract could continue.

activitiesConditions v warranties


In groups, come up with a business contract idea such as buying a new car and list in the table below what you think might be conditions and what might be warranties on that contract.


Business idea

Conditions Warranties

Implied termsImplied terms are not actually stated or agreed by the parties in the contract, but are implied or exist automatically in the contract by law. Examples are terms implied by statute such as contracts for the sale of goods where it is implied under the Sale of Goods Act 1979 that the goods sold are of satisfactory condition. Terms can also be implied by custom or by the common law such as the implication of fairness in business contracts.

The distinction between express and implied termsExpress terms are those terms and conditions that are negotiated and expressly agreed between the parties when the contract is being formed. Both sides have control over these terms and can strike these terms out and renegotiate other ones on the contract until all terms have been agreed.


Implied terms are those terms that are included in the contract by law; the parties have no say or control in the matter, and if they wish to do to business with each other, must follow these implied terms exactly.

Impact of contractual termsEach party to a contract expects the contract terms to be followed (for example, the delivery and payment of goods). The terms of the contract detail exactly what is expected on the contract, and it is important to consider the impact of such terms on contracts.

points for discussionThe importance of terms in a contract

Discuss the reasons why contract terms are required in a contract. You might discuss that their purpose is:

to set down what you have agreed to present the inflexible terms under which you will accept business

including defining the contract; defining the business procedures; protection of your business and your rights; limitation of your liability

other relevant matters.

Time for performance and rejection of goodsIt is normal for both sides to have agreed a date for delivery of the goods. This is known as the fixed delivery date and if there is a failure to deliver on time, it will allow the other person to reject the contract and sue for damages. If there is no fixed time for delivery, there is an implied term that the delivery will take place within a reasonable time.

Price variation


It is customary for businesses to include in contracts a term that is known as a price variation clause. This is included to take into account the price first agreed when the parties negotiated and any changes in the price due to unforeseen circumstances. A business will not want to lose out financially due to such a price change, and will make provision for such a rise by a term allowing them to increase the contract price.

activitiesReasons for price variationsAs business learners, you will be aware that businesses are existing in troubled times. Many businesses are having to both increase and decrease their prices on contracts. In groups, list as many reasons as you can why a business might have to vary the price on a contract. Obvious examples are fuel prices and weakened exchange rates.

Reason for price variation Effect on contractual price


Payment termsOne of the most important aspects of running a business is being paid. The payment for goods delivered by the seller is a vital part of the contract. Payment terms will normally be agreed between the parties when the contract is negotiated and it is normal business practice to demand payment on delivery, payment by instalments or payment by any method agreed by the parties.

Quality and quantity of goods deliveredWhen a seller delivers goods to the purchaser, it is expected that what was agreed to be delivered will in fact be delivered. In other words, the goods should match in terms of quality and quantity.

In relation to quality, the law implies into contracts that the goods delivered are fit for the purpose that they were intended. There is also an implication that they should be free from minor defects and be safe. The buyer will have time to examine the goods upon delivery before deciding to accept them

If the seller delivers the wrong quantity, then the buyer has various options available regardless of what was agreed between the parties.

If the seller delivers a smaller amount than was expected, the purchaser will be allowed to reject the total delivery.

If the seller sends a larger quantity, the purchaser can accept the exact quantity expected and reject the rest, reject the total delivery, or accept the entire delivery at a new contract price.

Reservation of titleIn many business contracts a seller will insert a clause into the contract that ownership (title) of the goods will not pass to the purchaser until the seller has been paid. This is known as a reservation of title.


activitiesBad terms in a contractBelow is part of a contract dealing with acceptance of the delivery and rejection of the goods. Can you see anything wrong with these terms? ACCEPTANCE and RETURNS

The Customer shall be deemed to have accepted the goods upon signing the contract and the buyer will not have the opportunity to reject the goods upon receipt even if they are faulty. The seller shall consider the products being delivered of satisfactory quality and fit for their purposes and the buyer will accept that fact by signing the agreement. There will be no opportunity for the buyer to reject the goods after the contract terms have been accepted.

If you think these terms are unfair, redraft them so that the buyer has more protection should the goods be faulty, different or late.

Exclusion clausesAn exclusion clause is a term in a contract that attempts to lessen the liability of a party who is in breach of the contract. For such a clause to be valid, they will normally have to be classed as fair and reasonable.

points for discussionExamples of exclusion clauses

‘Cars are parked at their owner’s risk’ is a common form of exclusion clause. In groups, try to find as many types of exclusion clauses as you can. Ask yourselves the following questions:

Why are they there? What are they trying to exclude? Are they fair and reasonable?


Standard form contractsAs mentioned earlier, businesses will use their own standard form contracts to deal with offer and acceptance and form the contract. Businesses will use these standard form contracts to limit their potential liability under the contract if things go wrong. Again, these terms must be fair and reasonable if they are to be valid.


4. The Impact of statutes on common contractual termsHistorically, businesses have been free to create contracts on whatever terms they wanted. The law rarely interfered with contract law, and seldom protected those who entered into bad bargains. It was simply up to the buyer to strike a fair bargain with the seller. Modern businesses are now incredibly powerful and have strong bargaining positions over smaller businesses or individuals, and Parliament has stepped in to look at the control over potentially unfair contracts.

Unfair Contract Terms Act 1977The Unfair Contract Terms Act 1977 (UCTA) is a very important piece of law which was passed by Parliament to try to protect innocent parties from unfair and unreasonable exclusion clauses.

There are some contracts where UCTA does not apply. These are contracts for land, insurance, company promotions, shares and debentures and patents.

Exclusion clauses must satisfy a test of reasonableness and fairness (for the court to decide) and if they do not, they can be struck out of the contract or declared void.

A business cannot exclude its liability for death or personal injury under the contract.

Unfair Terms in Consumer Contract Regulations 1994The Unfair Terms in Consumer Contract Regulations 1994 has extended the law on exclusion clauses. It applies to consumer contracts and means that the court can strike out any term in a consumer contract that it deems to be unfair. The idea of fairness looks at the background of the case and whether or not the parties have acted in ‘good faith’, and a judgement will be made on the basis of the bargaining strength of the parties, whether any inducements


were offered to make the consumer agree to the contract and whether the seller had dealt fairly with the consumer.


points for discussionCase study on limiting liability Look at the case of George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284; [1983] 2 AC 803.Finney Lock Seeds Ltd agreed to supply George Mitchell Ltd with 30lbs of winter cabbage for £192. An invoice sent with the delivery was considered part of the contract and limited liability for replacing ‘any seeds or plants sold’ if they were defective and excluded all liability for loss or damage or consequential loss or damage from use of the seed. In other words, the seed company was trying to avoid liability should the seeds fail. The seeds did fail, and the two sides ended up in court.

Do you think it fair and reasonable in the circumstances that the seed company should try to avoid liability?

What other types of cases could this type of exclusion clause apply to?

Who do you think should have won this case? Why should exclusion clauses only be effective if they are fair

and reasonable? Do they offer too much protection to the buyer and not enough

to the seller?


activitiesDrawing up exclusion clauses in a contract

In pairs, draw up an imaginary agreement between the two of you and try to limit your own liability on each set of terms. Remember the terms should be fair and reasonable and you should negotiate until you have an agreed set of terms. Your agreement might take the following format.PRICEPAYMENTPASSING OF PROPERTY (OWNERSHIP) DELIVERYACCEPTANCE RETURNS PROCEDURECANCELLATIONS

Consumer Protection (Distance Selling) Regulations 2000 (as amended)The Unsolicited Goods and Services Act 1971 (now updated by the Consumer Protection (Distance Selling) Regulations 2000) makes it a criminal offence for sellers to supply and then demand payment for unsolicited or unordered goods and services to unsuspecting consumers. In such a case, the person receiving the unwanted goods or services is under no legal duty to return or pay for the items and may treat them as a gift .


points for discussionProblems with distance-selling

Online selling poses a whole new set of problems for sellers and purchasers of products. Common clauses in Internet contracts have been challenged as being potentially unfair. Discuss the potential problems in Internet contract terms that:

allow suppliers to exclude or limit liability for damage to property or personal injury arising from the use of faulty goods

require consumers to incur charges (e.g. carriage charges) for rejecting faulty or wrongly described goods

exclude consumers' rights to reject faulty software

interfere with consumers' rights to cancel contracts for purchases made at a distance

withhold a cash refund and provide only for the issue of a credit note upon rejection of faulty goods

do not allow consumers a reasonable opportunity to inspect the goods for damage; or allow suppliers to unilaterally increase the price of goods once an agreement has been concluded.

Electronic Commerce (EC Directive) Regulations 2002There are many regulations controlling the use of online selling. An important piece of legislation is the Electronic Commerce (EC Directive) Regulations 2002. These provide that the person selling online is governed by the same contract law principles as normal businesses, and lays down strict criteria to be included in the terms and conditions of websites so buyers know what to do when things go wrong. These must include:

Full company identity details – name, a geographic address and an email address

Terms and conditions of the contract Description of the goods or services being offered


Pricing information, delivery charges and tax Information about how long the offer or price will last Details of the stages involved for the buyer in the ordering

process, including any costs of delivery The steps to follow to conclude a contract, so that consumers

will know when the contract is formed Information about the availability, dispatch and delivery of

goods Information about substitutes in the event that goods or

services expected are not available A complaints procedure and policy on returning goods Information about withdrawal/cancellation rights on the

contract A term stating that the contract is governed by UK law A data protection, security and privacy policy statement.

activitiesAre Internet businesses complying with the law?The Internet is now a major way for businesses to sell and make money. There are countless businesses which trade wholly on the web with companies such as Amazon and Ebay being the most well-known. The Electronic Commerce (EC Directive) Regulations 2002 have been produced to combat fears from consumers who do not know who they are trading with. The list above contains the main points an Internet business has to comply with. Choose a number of Internet selling sites and assess how each business complies with the regulations. Use the checklist below to help you.


Legal requirement Present on site Yes/No

Company identity

Terms and conditions

Description of goods

Pricing and delivery information

How long offer lasts

Stages in ordering and payment

When is a contract formed?

Availability and dispatch information

Substitutions information

Complaints/returns and cancellation

Where is the governing law?

Data, payment and privacy security issues

activitiesUnderstanding the legislationUsing the table below, complete your own research on the key statutes relevant to contract law.


Legislation Summary of key points

Effect on contract law

Unfair Contract Terms Act 1977

Unfair Terms in Consumer Contract Regulations 1994

Consumer Protection (Distance Selling) Regulations 2000

Electronic Commerce (EC Directive) Regulations 2002


5. Understand the meaning and effect of terms in a standard form contractMany contracts are concerned with agreements between businesses, and there are many contracts made between businesses and members of the public or consumers. Contract terms mean that there are statutory consumer protection laws implied into the terms of the contract to protect such consumers. It is important that businesses understand the effect of such terms in a contract.

Sale of goodsThe key piece of legislation which controls such contracts and protects consumers is the Sale of Goods Act 1979.

Definition of goods S2 (1) of the Sale of Goods Act 1979 defines a contract of sale of goods as:‘a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called price.’

Goods will include all items of property such as food, clothes and furniture, but land and money are not included.

Implied terms The Sale of Goods Act (sections 12-15) automatically implies a series of conditions in every contract for the sale of goods. These include:

Title: there is an implied condition on the part of the seller that he has the right to sell the goods.

Description: there is an implied term that the goods will correspond to the description (this includes, for example, size, quantity, weight, ingredients and country of origin).

Fitness and satisfactory quality: where a business sells in the course of their business, there is an implication that the goods


are of satisfactory quality (free from minor defects) and that they are fit for a particular purpose. The Sale and Supply of Goods Act 1994 states that a seller can escape liability if he brings defects to the buyer’s attention and the buyer accepts them, and where the defect should have been easy to see if the buyer had inspected the goods properly.

points for discussionAnalysis of sale of goods lawS13(1) of the Sale of goods Act 1979 provides that where there is a contract for the sale of goods by description, there is an implied term that the goods will correspond to the description. S13 is simply concerned with description and not quality. Imagine a case where there is a contract for the sale of 3,100 tins of peaches and the goods are described as being packed 30 tins to a case when in fact some of the tins are packed 24 tins to a case, although the same number of tins are delivered.

Would the buyer be entitled to reject the delivery? If so, on what grounds?

What else could the buyer do?

SampleThe Sale of Goods Act 1979 provides that in a contract of sale by sample, there is an implied condition that the bulk will correspond to the sample in quality, that the buyer will have a reasonable opportunity of comparing the bulk with the sample and that the goods will be free from any defect making their quality unsatisfactory which would not be apparent on reasonable examination of the sample.


activitiesThe problem with buying from a sampleFiona runs a Fair Trade business called ‘Hope for the Future’ which imports a variety of Fair Trade and Eco-friendly products. She has been to India where she has secured a purchase of 500 tons of tea grown by a village which her business has helped build. She was shown a sample of the tea and it was of the finest quality. When the tea arrived at her shop it was different from what she was shown. On the top was the Indian tea, but in the sacks were quantities of rotting and mouldy tea and some of the sacks had clearly the words ‘Made in China’ on them. Fiona does not know what her legal position is regarding this tea. Identify the main legal problems and explain to Fiona what her contractual position is.

Main legal problem Fiona’s contractual position

Supply of goods and servicesThe sale of goods legislation was only ever intended to deal with consumer contracts for purchasing goods. It did not cover the provision of the supply of goods or services. So the Supply of Goods and Services Act 1982 was passed to remedy this defect in the law.

Definitions

Contracts covered under the legislation include contracts for work and material (building work, car repairs, installation work such as central heating and double glazing, hairdressing and gardening), contracts where no money changes hands (exchange or barter), contracts for ‘free gifts’ (where a buyer


is given a free product if they buy another) and contracts for hire of goods (including the hire of cars, machinery and clothing).

Implied terms for supply of goods and services, work and materialsThe Supply of Goods and Services Act 1982 implies terms into contracts for the supply of goods and services.

S2 contains an implied condition that the person who is providing the goods or services has the legal right to provide the goods or services.

S3 provides that where the transfer is for goods or services by description, there is an implied condition that the goods will correspond to that description.

S4 provides that where goods are transferred in the ordinary course of business, there is an implied condition that the goods are of suitable quality and fit for the purpose intended.

S5 provides that where there is a transfer of goods by reference to a sample, there is an implied condition that the bulk will correspond to the sample.

Implied terms for hire of goods under Supply of Goods and Services Act 1982These apply to contracts where one person agrees to supply goods to another by way of hire such as the hire of cars or machinery. The Supply of Goods and Services Act 1982 implies terms into such contracts.

S7 provides that there is an implied condition that the person providing the hire has the right to transfer the goods to the person hiring it.

S8 states that where there is a contract for the hire of goods by description, there is an implied condition that the goods will match that description.


S9 provides that where goods are hired in the course a business, there is an implied condition that the goods are of a satisfactory quality and reasonably fit for the purpose intended.

S10 covers implied conditions in relation to contracts for the hire of goods by sample whereby the bulk must match the sample.

False trade descriptionsWhen the parties begin to negotiate a contract, each side will make statements and representations about what they want from the contract and what is expected. Representations may induce the buyer to enter into the contract. Representations may include statements about the items being sold and the benefits of them. It is hoped that such representations are true and that the parties have entered into the contract with all of the relevant facts.

The law clearly states that any descriptions of goods and services given by a person acting in the course of a trade or business, should be accurate and not misleading. Misleading descriptions of this type are called ‘false trade descriptions’ and amount to a misrepresentation of the facts and are against the law.

activitiesFalse descriptions - sale of goodsIn December 2008, a firm set up a Christmas theme Park in the New Forest called Lapland New Forest. Its Internet site made fantastic claims showing photographs of the site showing traditional Lapland scenes promising visitors a wonderful winter experience. Thousands of customers booked tickets, only to find that the park was little more than a muddy field in the New Forest with fake or imitation animals and no real evidence of the Lapland experience. Promised on the website. The customers were refused their money back and Dorset Trading Standards were asked to investigate.

What contractual issue does this raise? What more serious legal issue does this raise?


What can the customers do to try to get their money back?

Trade Descriptions Act 1968The Trade Descriptions Act 1968 makes it a criminal offence for a seller to mislead a consumer by a false description. Any description of goods sold, hired or supplied must be accurate and should not falsely induce a consumer to contract with the business. The description could be in writing, contained in an advertisement, an illustration or made verbally during a sales negotiation. False descriptions can include misleading statements about quantity and size of the product, what it is made of, where and how it was made, its age, its fitness for purpose and endorsements from famous people or organisations. It can also include statements about services, accommodation and facilities on offer at establishments.

It is very serious matter, and a person found guilty of false trade description offences could go to prison.

points for discussionFalse claimsIn July 2008, the UK Office of Fair Trading was granted an injunction by a court in Holland against a mail order catalogue firm called ‘Best Deal’ which is based in Holland. They were sending out prize notifications to UK consumers saying that they had definitely won a cash prize of up to £10,000 and could win a lot more. All they had to do was place orders with the mail order firm. The firm were found to have misled consumers into placing orders on the false claim that they were winners. The injunction was granted by the court to stop this ,and if the firm breaks the injunction they face a fine of up to one million Euros.

What contractual issues does a case like this raise? What laws has Best Deal broken?


Why has the law stepped in to protect consumers who have made this bad bargain?

Link to misrepresentationBreaking the Trade Descriptions Act creates a criminal offence, but also makes the person liable under civil law for misrepresentation for which damages may also be awarded.

activitiesKnowing the law on sale of goodsYou need to be familiar with the law that is relevant to contracts. Businesses rely on the accuracy of their contracts to ensure effective and hassle-free business dealings. Any person running their own business needs a good understanding of contract law and it is useful for you to be able to summarise the main contract law legislation. Fill in the table below to create a guide to the relevant law.

Legislation Summary of what it does

Effect on contracts

Sale of Goods Act 1979

Supply of Goods and


Services Act 1982

Trade Descriptions Act 1968


6. Be able to apply the remedies available to the parties to a contract

RemediesThe contract is a set of legally enforceable promises so that if one side fails to keep that promise and breaks the terms of the contract, the other side who was expecting the contract to go ahead may be able to gain some form of compensation for the loss of the contract. This is known as a remedy and is designed to ensure that the person has not lost out. These remedies can be written into the contract or exist as what are known as equitable remedies coming from the historical idea of equity or fairness and justice.

Damages The main remedy available is damages. This a monetary sum aimed at financially compensating the person who has lost out on the contract. Damages are split into two types:Liquidated damagesThis is an agreed term of the contract where the parties will know in advance exactly how much damages will be paid in the event of a breach of contract. The idea behind these damages is to make the parties aware of the consequences of their breach of contract in advance to prevent it happening at all.Unliquidated damagesThese are different from liquidated damages in that there is no agreement beforehand about damages, and the aim is to put the aggrieved party back in the financial position they would have been if the breach had not happened. These damages are not designed to reward those suffering a breach of contract, but merely to ensure they do not suffer financially. It can include financial loss, damage to property, personal injury, distress and disappointment.


The courts will only compensate for losses that are directly related to the breach of contract, and if they are too distant or too remote the claim will fail.


points for discussionThe case for liquidated and unliquidated damages

What type of cases would use liquidated damages and what type would use unliquidated damages? Give examples.

Mitigation of lossA victim of a breach of contract must act to prevent loss. They cannot simply stand back and allow the losses to get worse. They must try to lessen the impact of the loss by showing to the court that they have tried to mitigate their losses, and have tried everything they can to avoid damages being awarded to them. A seller, for example, whose goods have been rejected, must attempt to get the best price for them elsewhere.

Rejection of contractThe person who is the victim of a breach of contract may reject the entire contract. This can happen for a variety of reasons where the contract fails because of failing to deliver on time, delivering the wrong quantity or delivering goods of poor quality. If the contract is rejected, the person has the right to also claim for damages for breach of contract.

LienThe owner of goods on the contract may be able to exercise what is known as a lien over the goods. This is the right to retain possession and ownership of the goods until the contract price has been paid.

Resale


Where a seller of goods remains unpaid, they will be allowed to resell the goods when the goods are perishable and likely to be ruined, where the seller has told the buyer of the resale and the buyer fails to respond, or where the term of the contract allows the seller to do this. In such cases, the seller will still be able to claim damages.

Reservation of titleA remedy that is often written into the contract is the right of the seller to reserve title (or to retain ownership of the goods) until the contract price has been paid. This will enable the seller of the goods to recover the goods in the event of the liquidation or bankruptcy of the buyer, so that the seller’s goods are not lost to the buyer’s creditors.

InjunctionAn injunction is a court order that either part can apply for, ordering the party at fault not to break the contract.

Its main use in business terms is to enforce certain contracts such as employment contracts restraining employees working in a similar capacity for rival employers.

Specific performanceSpecific performance is an equitable remedy (based on fairness and justice) which is granted in cases in which damages are not considered an adequate remedy or resolution. Specific performance requires the party in breach of contract to actually carry out their contractual promises and complete the contract.


activitiesApplying the correct remedy for breach of contractConsider the following remedies that are available for breach of contract:

liquidated damages

unliquidated damages

rejection of contract

lien

reservation of title

injunction

specific performance.

From this list apply what you think are the right remedies to the following cases:

A performer who has been booked for an event tells the organiser the day before that they can’t come.

A garage is repairing a car and the owner collects it without paying the bill.

A builder is waiting for a delivery of bricks. It arrives two weeks late, and in the meantime he has found another supplier.

A person in a very important job has resigned and is working their notice. They are threatening to tell trade secrets to their new employer (your rival competitor).

You run an online business selling vegetables. A purchaser has offered to buy all of your carrots but has not paid for them, and another person has now bought them.

You have been waiting for a delivery of 500 wall tiles and you are surprised when 5000 arrive instead.


7. Application of remediesIn a contract case, where a breach of contract has occurred, the parties will be able to claim one or more of the remedies that have already been discussed. There is no automatic right to have one of these remedies and the person who is the victim of the breach of contract will have to go to court to gain their remedy. This person is known as the claimant and the person who has breached the contract is known as the defendant.

The courtsWhere a contract has broken down and the parties are unable to resolve their differences, the case will have to be resolved in the civil courts.

There are many benefits of going to court. The result is certain and it provides a formal basis for parties to resolve their disputes. There are, however, many drawbacks including the time and cost of the case itself and the uncertain nature of its outcome.

There are three main civil courts that can hear cases. They are the Small Claims Court, the County Court and the High Court.

When you make an application to court, your contract case will be given to a judge who will allocate it to the correct court depending on the seriousness of the case. This is known as the ‘track’ system. Which track your case is put on depends on the seriousness of the case.

The small claims track deals with small claims court cases, the fast-track deals with County Court cases and the multi-track system deals with complex High Court cases. Small Claims CourtThis is part of the County Court which deals with minor claims including contractual and business disputes where the claim does not exceed £5,000. This will include many breach of contract claims such as failure to supply goods, failure to pay for goods and other business disputes. These cases are simple and straightforward and are not


expected to raise any difficult questions of law. It is possible for the case to be heard without the parties present, or there may be an informal hearing where each party can make representations. It is not normal for either side to need legal representation.


The County Court The County Court deals with fast-track cases worth between £5,000 and £15,000. The County Court also has the power to hear cases concerning the recovery of land, bankruptcies, company winding-ups, consumer credit and copyright matters. Jurisdiction means they have the power to hear those cases. It is in the County Court that more serious cases of breach of contract will be heard. Procedures are more formal with more of a trial-based system where both sides put their argument and the judge decides the outcome. It is more normal to be represented by a solicitor or a barrister in this court. The High CourtThe High Court is the most senior of the civil courts. Based in London and larger cities, it is split into three divisions dealing with different branches of civil law.

It is the Queen’s Bench division that will hear serious breach of contract cases. They are appointed to the multi-track and concern contractual disputes for large sums of money over £15,000 or involve complex points of contract law.

points for discussionAlternatives to court

There are a range of alternatives to courts such as Alternative Dispute Resolution, the use of mediation and arbitration and the application to a tribunal. Look at these alternatives and assess whether they offer a better solution for many businesses that are in dispute.

Time limitsIf you have a contractual dispute, your right to make a claim has a time limit attached to it. The Limitation Act 1980 imposes time limits to bring an action. The majority of simple contract disputes must be


brought within six years of the breach of contract. For more complex contracts and for contracts made under deed (such as the sale of land), the time limit is within 12 years of the breach of contract, and in both cases this time limit can be extended where fraud is involved, or where the person making the claim is suffering from a disability or lacks capacity to deal with the matter.

activitiesWhich court will be used?Although the court will allocate your case to the relevant track, it is important that you have some idea of the type of court your case will be heard in. Consider the following situations and decide which court the case might be heard in and any other relevant factors.

A claim for £11,000 for unpaid work.

£2,500 owed for work completed eight years ago.

A bill for goods supplied valued at £17,500.

A contract dispute for £500,000 that began fifteen years ago.

A claim for £500.

A contract dispute for £12,000 involving complex tax law and laws from abroad.

An unpaid bill of £30.

activitiesMaking a claim in courtWhen you have a breach of contract and all other forms of resolution have failed, your only recourse will be to go to court. The ability of businesses to recover money that is owed will be a very important aspect of their operation.You run a business called Healing Hands. It is a sports injury clinic and one of your main clients is the local professional football team. Your firm provides extensive treatments and facilities for a flat monthly fee of £200. The team is bottom of the


league, its fans are not turning up and it is in severe financial crisis. The club has not paid you for two months and despite several letters and phone calls they will not pay you. Reluctantly you have seen a solicitor and she has told you to go to the Small Claims Court and she will represent you. Look at the facts of the case study and fill in the relevant details on the court claim form provided. You will need to know certain facts to achieve this.

You (the claimant) will need to provide your firm’s name and address.

You will need to know the football team’s name and address (you can find one to do this)

You will need to know your solicitor’s name and address (again you can look this up)

You will have to do some research to find the solicitor’s costs.


points for discussionUsing a solicitor or representing yourself

Having found out how much a solicitor will charge you for a relatively small claim, discuss the advantages and disadvantages of being represented by a solicitor in such a case, and consider in which type of case it might be necessary to have legal representation.


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