Alan Massenhove, partner at Sykes Anderson LLP’s Litigation and Dispute Resolution department offers a litigator’s insight into the minefield of commercial and consumer contracts.

Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it.

Contracting Trouble?

Contracts are essential to business, necessary at all levels from concept to end product or service and throughout the supply chain. The basic rule applied by the courts in determining whether contracts are enforceable is that the legal elements of offer, acceptance and consideration should exist. Unfortunately for businesses, contract law has been interpreted, honed and rewritten by the courts for 400 years and, increasingly, by statute and European law. What the average business is now left with is a myriad of confusing and contradictory rules determining how and to what extent contracts should be enforceable. Here are a few pointers to help you navigate the rules.

The Basics

There are some concepts which are central to all types of contract from employment contracts to buying milk without which a contract cannot exist. Put in simple (!) legal terms these are offer, acceptance and consideration. Although usually fairly straightforward in the business context there are a number of issues which you need to be able to spot:

• Subject to certain exceptions, contracts can be verbal as well as written. While it is highly advisable to set out the contract in writing, a verbal contract is equally binding and equally enforceable. The main problem with verbal contracts is proving what the terms are from an evidential point of view.

• The offer needs to be clear and contain sufficient terms that, if accepted, enable the courts to identify what the contract is for. The absence of key terms (such as price) can be fatal to a contract.

• Acceptance must be absolute. In the absence of an agreement including all key terms, there can be no binding contract:

• Rejection of some terms is likely to be a counter-offer and therefore no binding contract would be in place.

• If the contract was partially performed it would be difficult for a court to establish what the terms of the contract were.

• The ‘battle of the forms’ - offers are made on the standard terms of one party and accepted on the standard terms of the other.

• Consideration: This means that there has to be something of value passing both ways between the parties. The courts will not assess the adequacy of the consideration and there is no requirement for the value of the consideration passing each way to be equal but there must be consideration for a contact to be enforceable (unless it is made in a deed).

• Special circumstances such as fraud, illegal contracts and contracts obtained by means of duress or if one of the parties does not have capacity – because of their age or health - will render contracts void and unenforceable.

• Contracts can be affected by mistake and misrepresentation so that if a party enters into a contract under the influence of a mistake of fact or law or due to a misrepresentation the contract may subsequently be rescinded (annulled) even if the contract would otherwise be enforceable.

• Contracts are an agreement. They can be changed or replaced at any time by a new agreement between the same parties. In some circumstances, the law implies changes based on uncontested conduct of the parties over a period of time.

• Incorporation of terms. There are a number of ways in which terms can be incorporated into contracts however it is not possible to incorporate additional terms after the offer has been accepted without the agreement of the other party. This is a common mistake where companies include printed terms and conditions on their invoices.

Commercial Contracts

The general approach of the English courts in commercial contracts is that businesses are on a more or less equal footing for negotiations and should therefore bear the consequences of the contracts that they sign without too much assistance or interference from the court. The doctrine of freedom of contract is the guiding principle. The key areas in which the law does not merely interpret the agreed wording include:

• Jurisdiction - express clauses are increasing important in today’s global economy. In the absence of a jurisdiction clause, parties may become embroiled in expensive litigation determining which court gets to decide the dispute!

• Competition issues. There are laws restricting anti-competitive agreements on both a UK and European level.

• UCTA – This is the Unfair Contract Terms Act 1977. Its primary accepted effect is to prevent contracts excluding liability for death and personal injury. There is a list of terms which are deemed unfair under UCTA however the courts have traditionally interpreted UCTA restrictively.

Consumer Contracts

The traditional English approach to contracts has been severely curtailed in the area of consumer contracts due to the influence of the EU. Starting with the Consumer Credit Act 1974 and progressing through the Unfair Terms in Consumer Contracts Regulations 1999, the position in respect of consumer contracts is almost the opposite to commercial contracts. Courts are taking an increasingly consumer protectionist approach and will interfere in almost any contract which has resulted in unfair liability on the consumer. Key areas to watch out for include:

• Consumer Credit. If you are offering any products on credit, it is essential that all consumer credit laws are complied with. Even advertising consumer credit deals in store or online requires compliance with detailed rules.

• Unfair Contract Terms. The regime under the Unfair Terms in Consumer Contract Regulations 1999 is weighted heavily in favour of the consumer. There are detailed guidelines as to what is and is not an unfair term and any unfair terms are deemed void. Special care should be taken when contracts are made on your standard terms of business.

• Cooling Off periods. The cooling off period is a concept with which English businesses are having to become increasingly familiar. Consumer Credit agreements and agreements affected by the Distance Selling Regulations carry prescribed cooling off periods in most circumstances. This allows the consumer to cancel the contract without incurring any liability for a statutory period – usually 7 days after it is signed.

• Jurisdiction. Although a jurisdiction clause is advisable in a commercial contract, it is unlikely that this will help you in a consumer contract. The primary jurisdictional rule is that if you are suing a consumer, you bring the claim to them in the country of their residence. This can be altered by express agreement however in practice such an agreement is unlikely.

Specific Contracts

There are specific types of contract which can present specific problems. Areas which have such specific regulation include contracts of employment (which, as every employer knows, qualify for such a degree of specific protection that they constitute a whole area of law in themselves) consumer credit act contracts, e-commerce contracts commercial agency contracts and contracts relating to interests in land.

Dealing With Contracts

It is an undeniable fact of life that businesses have to deal with contracts. It is also necessary for businesses to try, as far as possible, to trade on their own terms and conditions which they have drafted and which they understand. Businesses should not assume that their standard terms and conditions will be appropriate for all contracts for the indefinite future. They should be reviewed and updated at regular intervals, particularly when new consumer legislation comes into force.

If notice of a dispute comes your way, you should seek specific legal advice prior to taking any steps. Beginning to construct your own defence may well be counter productive.

Torts and Contracts

It should be remembered that contracts are not legal vacuums. Very often contracts give rise to specific duties between the parties which are impacted by other areas of law. A contract founds a duty of care between the parties which may give rise to a claim in negligence if the goods or services provided are not up to accepted standards – even where there is no breach of contract as such. There is also a duty on third parties not to interfere with the lawful performance of a contract which they have knowledge of and provision for third parties to rely on contractual terms which confer rights on them notwithstanding that they are not parties to the contract themselves.

And Finally…

The Government are proposing to redraft the statute book as it relates to contracts to consolidate UCTA and the Unfair Terms in Consumer Contract Regulations 1999. It is not possible for the application of the Regulations to be limited without European intervention as these are based on European Law. It is highly likely that the protection enjoyed by consumers will continue and the protection enjoyed by businesses will be extended at least in part to match.