When entering into an agreement with another party, it is important to have a contract that establishes the parameters of a business relationship. Without clear boundaries being developed, misunderstandings can occur.
The main benefit of having a well-drafted contract is that it can offer protection from litigation. If things go awry in a business relationship, settling a dispute in court is not only a time-consuming exercise, but costly too.
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When forming a contract with another party, the following five elements below must be present. Without the presence of each element, a contract has not been formed.
- Offer: An offeror makes an offer of goods or services to an offeree in exchange for something else.
- Acceptance: The offer is accepted by a person who has the legal authority to enter into the contract.
- Intention: An intention to create a legal relationship, where each party agrees to be bound by the shared terms of the agreement, is an element of contract formation.
- Consideration: This constitutes ‘a price for a promise.’ In other words, it is where the promisor expects a reward in exchange for the promise. Ultimately, it is the benefit that both parties to a contract receive.
- Capacity: A person must have the legal capacity to enter into a contract. A person must understand what is being entered into. Example of persons without legal capacity are minors, or people who are intoxicated or impaired in some way.
Essential and non-essential terms of a contract
An understanding of how essential and non-essential terms operate in contract law provides each party with a greater knowledge of the consequences of a breaching it.
Essential terms are conditions that are seen as so important that a party would not have entered into the contract, but for the essential term. It is the purpose for entering into a contract as it goes to the ‘root’ or ‘heart’ of a contract. The other party knows or should have known that strict adherence, or substantial performance, of a term is expected.
A breach of an essential term of a contract is a fundamental breach that entitles the innocent party to terminate the contract. The effect of this is that the innocent person is discharged from the performance of any future obligations specified in the contract.
Damages may also be awarded for a breach of an essential term of a contract.
Non-essential terms – or an intermediate term of a contract, is regarded as a minor term of the contract. A breach of a non-essential term does not give a party an automatic right to terminate the contract.
Only serious a breach of a non-essential term may give rise to damages, and the termination of a contract.
Remedies for a breach of contract (for a claimant)
If a contract has been breached, the court will assess the breach to determine the appropriate remedy for the claimant.
Remedies for a breach of contract fall under two categories: equitable remedies or remedies at common law.
While a court will award common law remedies for a proven breach of contract, it is not obligated to award an equitable remedy, even where a breach has been determined.
The most common remedy given by a court is an award of damages.
- Award of damages (common law remedy)
- Where a party has sustained a loss as a result of a breach of contract, damages is a remedy that seeks to redress the loss through a payment of compensation.
- An award of damages aims to place the affected party in the same position as if the contract had been performed.
- Liquidated damages may be awarded where a term in a contract stipulates that a fixed sum is payable as damages for a breach of contract.
- Nominal damages may be awarded where no loss has been sustained, but a legal right has been trespassed.
- Specific performance (equitable remedy)
- Specific performance is a remedy that a court may order, directing the breaching party to perform the term or terms of the contract. The aim of specific performance is to place the claimant in a position as if the breach had not occurred.
- Injunctions (equitable remedy)
- This is where the court directs a party to refrain from certain conduct that might place it in breach of the contract.
- Restitution (equitable remedy)
- Restitution is where the claimant is returned to the position that she, he or they would have been in prior to the commencement of the contract so that there is no loss.
- Recission (equitable remedy)
- Rescinding or cancelling a contract is an equitable remedy that is available where vitiating factors to a contract exist. Vitiating factors can invalidate or render a contract unenforceable.
Defences to a breach of contract (for a defendant)
The way in which to defend an alleged breach of breach is to claim that the contract is unenforceable. Unenforceable contracts are those that are not legally binding in court.
If it has been alleged that a party to a contract has breached it, a defendant may raise one, or more, of the following defences below:
- Lack of capacity
- A contract can be voided where a person does not have the capacity to understand what is being agreed to. Example of persons without legal capacity are minors, or people who are intoxicated or impaired in some way.
- Undue influence
- This occurs where there is an imbalance of power between two potential contracting parties, and the party wielding the greater power uses their leverage to induce contractual relations. Examples of undue influence might occur in relationships between doctor-patient or parent-child.
- This refers to unsolicited pressure placed on a person to sign a document that a person does not want to sign. A threat is an example of duress in contract law.
- This is where a person has been induced or enticed to enter a contract following the provision of false information. Misrepresentation can fall into three categories: innocent, negligent or fraudulent.
- Where a person has relied on the representation and a suffered a loss, varying remedies are available for all forms of misrepresentation.
- A non-disclosure clause in a contract seeks to protect sensitive information from competitors. Financial and criminal penalties may apply if a non-disclosure clause in a contract is breached.
- However, the court will not uphold or protect clauses that are not specific in the language used, or in describing what is deemed confidential. Additionally, non-disclosure clauses cannot aim to keep non-confidential information confidential. Such clauses may be regarded as oppressive or onerous.
- Where a contact term is manifestly unjust, favouring one party to a contract over another, it is said to be unconscionable, or contrary to good conscience. In practical terms, this creates a situation where one party becomes unable to reap the benefit of the agreement.
- Though unconscionability is not technically a defence, unfair terms can render a contract unenforceable.
- Public Policy
- Courts will not enforce a contract that is illegal or harms public policy. Such contracts are said to be contrary to the administration of justice. A contract that promots corruption of any sort will be voided.
- Unclean hands (the ‘dirty hands’ doctrine)
- This can be raised as a defence when both parties to a contract have allegedly breached it. A defendant raises this defence to prevent a claimant from getting damages, as wrongdoing has been committed by both parties. The claimant then bears the burden of proving there has not been any wrongdoing on their part.
- Force majeure
- A force majeure clause is activated when a contract becomes impossible to perform due to circumstances beyond the control of a party to a contract. An example of this happening is where changes to laws restrict businesses from fulling their obligations, which transpired during the pandemic.
- Common mistake – where both parties to a contract hold a mistaken belief that renders the contract void of all substance. An example of this might occur where a manufacturer that contracts with a supplier, both believe that resource needed to make a product is available, but isn’t.
- Mutual mistake – this is where a material fact has been misinterpreted by both parties. For example, parties might be a cross purposes with one another if a navy dress is sold to a customer requiring a black dress. Neither realise the mistake at the point of sale. Here, the mistake is mutual.
- Unilateral mistake – this occurs when one party to a contract is mistaken about the terms (words, definitions, quantities etc) of the contract. Recission may occur where the other party takes advantage of the mistaken party’s ignorance, and obtains a benefit by not rectifying the mistake. Courts can even rule that the other party should have been aware of the mistake even it had been claimed otherwise.
- Mistake as to identity – this involves fraudulent activity where a person has deliberately concealed their identity.
Mistake as to the document signed – Where a person signs a contract that differs markedly from the original document, that contract may be vitiated.
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