For students embarking on the Graduate Diploma in Law (GDL), contract law is a foundational subject that underpins many other areas of legal practice. This guide provides a structured overview of the essential principles of contract law in England and Wales, specifically tailored to the needs of conversion students who are new to the subject. We will cover the key stages of a contract's life, from its formation to its potential discharge and the remedies available for breach.
💡 Key Takeaway
Contract law is a system of rules governing the creation and enforcement of agreements. For a binding contract to exist, there must be an agreement (offer and acceptance), consideration, and an intention to create legal relations. Understanding this core structure is the first step to mastering the subject on the GDL.
Formation of a Contract: The Core Requirements
The starting point of any contract law analysis is to determine whether a valid contract has been formed. This requires a close examination of the interactions between the parties to identify a clear offer, an unequivocal acceptance, sufficient consideration, and a mutual intention to create a legally binding relationship.
Offer and Acceptance
An offer is a clear and certain statement of terms on which the offeror is prepared to be bound. It must be distinguished from an 'invitation to treat', which is merely an invitation to negotiate. For example, goods displayed in a shop window are an invitation to treat, as established in Fisher v Bell [1961] 1 QB 394. Acceptance must be a 'mirror image' of the offer. Any variation constitutes a counter-offer, which destroys the original offer, as seen in Hyde v Wrench [1840] 49 ER 132.
Consideration
Consideration is the 'price of the promise' – each party must give something of value. It need not be adequate but must be sufficient. This means it must have some value in the eyes of the law. A famous, albeit criticised, case is Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87, where chocolate wrappers were held to be part of the consideration. Past consideration is no consideration, as demonstrated in Re McArdle [1951] Ch 669.
Intention to Create Legal Relations
The parties must intend their agreement to have legal consequences. There is a rebuttable presumption that domestic or social agreements (e.g., between family members) are not intended to be legally binding (Balfour v Balfour [1919] 2 KB 571), while commercial agreements are (Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 WLR 1).
The Terms of the Contract
Once a contract is formed, its content is determined by its terms. These can be express (explicitly agreed) or implied (incorporated by law or custom). It is crucial to distinguish between a term and a mere representation (a statement made before the contract was formed).
Express and Implied Terms
Express terms are those agreed upon by the parties, whether orally or in writing. Implied terms are not explicitly stated but are read into the contract by the courts or by statute. For example, the Sale of Goods Act 1979 implies terms as to quality and fitness for purpose in contracts for the sale of goods. The courts may also imply terms based on business efficacy, as in The Moorcock [1889] 14 PD 64.
📝 Exam Tip
In problem questions, you will often need to advise a client on whether a statement made during negotiations became a term of the contract. Consider the importance of the statement, the relative expertise of the parties, and whether the agreement was reduced to writing. The 'parol evidence rule' is a key concept here.
Vitiating Factors: When a Contract Goes Wrong
Vitiating factors are elements that can invalidate an otherwise validly formed contract. These include misrepresentation, duress, undue influence, and mistake.
Misrepresentation
A misrepresentation is a false statement of material fact made by one party to another, which induces the other party to enter into the contract. The remedies depend on whether the misrepresentation was fraudulent, negligent, or innocent. The key statute governing this area is the Misrepresentation Act 1967. A classic case on inducement is Redgrave v Hurd [1881] 20 Ch D 1.
In Derry v Peek [1889] 14 App Cas 337, Lord Herschell defined fraudulent misrepresentation as a statement made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false.
| Type of Misrepresentation | Remedy | Key Feature |
|---|---|---|
| Fraudulent | Rescission and Damages (Tort of Deceit) | Dishonest intent required. |
| Negligent | Rescission and/or Damages (under s.2(1) of the Misrepresentation Act 1967) | No reasonable grounds for believing the statement was true. |
| Innocent | Rescission or Damages in lieu (at court's discretion) | Honest belief on reasonable grounds. |
Discharge of Contract
A contract can be discharged (brought to an end) in several ways: by performance, agreement, breach, or frustration.
Discharge by Frustration
Frustration occurs when an unforeseen event, after the contract is made, renders performance impossible, illegal, or radically different from what was contemplated. The classic case is Taylor v Caldwell [1863] 3 B & S 826, where a music hall burning down frustrated a contract for its hire. The effects of frustration are governed by the Law Reform (Frustrated Contracts) Act 1943.
⚠️ Common Mistake
Do not confuse a bad bargain with frustration. If a contract simply becomes more difficult or expensive to perform, it is generally not frustrated. The doctrine is applied very narrowly by the courts, as shown in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
Remedies for Breach of Contract
When one party fails to perform their contractual obligations, the innocent party is entitled to a remedy. The primary remedy is damages, but equitable remedies like specific performance or injunction may also be available.
Damages
The aim of damages is to put the innocent party in the position they would have been in had the contract been properly performed (the 'expectation interest'). The principles of remoteness, as established in Hadley v Baxendale [1854] 9 Ex 341, limit the extent of recoverable losses. The claimant also has a duty to mitigate their loss.
Frequently Asked Questions (FAQ)
What is the difference between a unilateral and a bilateral contract?
A bilateral contract is the most common type, where both parties exchange promises (e.g., I promise to sell you my car, and you promise to pay me £5,000). A unilateral contract is where one party makes a promise in return for an act by the other party, as in the famous case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
Can a contract be made verbally?
Yes, a contract can be made orally and be just as binding as a written one. However, some contracts, such as those for the sale of land, must be in writing to be enforceable, as required by the Law of Property (Miscellaneous Provisions) Act 1989.
What is the 'postal rule'?
The postal rule is an exception to the general rule that acceptance must be communicated. It states that where post is a reasonable method of communication, acceptance is effective as soon as the letter is posted, not when it is received. See Adams v Lindsell [1818] 1 B & Ald 681.
What is economic duress?
Economic duress occurs when one party uses illegitimate economic pressure to force the other party to agree to a contract or a variation of a contract. The pressure must be a significant cause inducing the victim to enter the contract, and there must be no practical alternative. See Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833.