Ewan McKendrick

What is a Term

Having considered what the law recognises as a valid, enforceable contract and who is bound by that contract, we shall now consider the contents of a contract. This section is divided into four chapters. In this chapter we shall consider what constitutes a term of the contract; in Chapter 9 we shall discuss the sources of contractual terms; in Chapter 10 we shall consider the classification of contractual terms; and in Chapter 11 we shall analyse a particular type of contractual term, the exclusion or limitation clause.

Offer and Acceptance

We noted in Chapter 2 that the courts adopt the ‘mirror image’ rule of contractual formation; that is to say they must find a clear and unequivocal offer which is matched by an equally clear and unequivocal acceptance. In this chapter we shall give more detailed consideration to the constituent elements of an offer and an acceptance. However, three points should be noted at the outset of our discussion.

Intention to Create Legal Relations

The fact that the parties have reached agreement does not necessarily mean that they have concluded a legally enforceable contract, even where the agreement is supported by consideration. The following fact situation will demonstrate the point. I promise to pay my wife £50 if she will type the manuscript of this chapter of the book. My wife agrees. Does this agreement create a legally enforceable contract? On the face of it there appears to be no reason why it should not. We have reached agreement and the agreement is supported by consideration. But it is likely that an English court would conclude that we had not entered into a legally binding contract because we lacked an ‘intention to create legal relations’, which has been held to be an essential element in any contract. Before examining the relevant case law, we must stop and contemplate the juristic basis of this doctrine of intention to create legal relations.

Damages for Breach of Contract

We have already noted that a breach of contract gives rise to an action for damages, whether the term broken is a condition, a warranty or an innominate term. In this chapter we shall discuss the principles which are applied by the courts when assessing the damages payable on a breach of contract. The principles applied by the courts are of great significance to the debate about the basis of the law of contract, to which we referred in Chapter 1. The claim that contract law can be separated from the law of tort and the law of restitution rests, to a large extent, on the proposition that the law of contract seeks to fulfil the expectations engendered by a binding promise (see 1.4). In this chapter we shall put that claim to the test by asking ourselves the fundamental question: does the law of contract really fulfil the expectations engendered by a binding promise? But before we seek to answer that question we must define the ‘expectation interest’ with greater precision and we must also examine the question whether the law of contract protects either the ‘reliance interest’ or the ‘restitution interest’.

Agreement: Clearing the Ground

To say that contract is based upon the agreement of the parties may be a trite statement but it is also a statement which begs a number of questions. Two of these questions will be dealt with in this chapter. The first is: who decides whether or not the parties have indeed reached agreement? Is it the parties or is it the courts? The second question is: how is it decided that the parties have actually reached agreement?

The Sources of Contractual Terms

There are two principal sources of contractual terms: express terms and implied terms. Express terms are the terms which are agreed specifically by the contracting parties and implied terms are those terms which are not specifically agreed by the contracting parties but which are implied into the contract by the courts or by Parliament. We shall deal with implied terms at 9.8. Here we shall focus our attention on express terms.

Duress, Undue Influence, and Inequality of Bargaining Power

The law of contract has always placed limits upon the exercise of economic power by contracting parties (see Reiter, 1981). This role has traditionally been played by the doctrines of duress and undue influence, although recent years have also witnessed a (largely abortive) attempt to introduce into the common law a doctrine of inequality of bargaining power. While the English courts appear to have abandoned the attempt to create a doctrine of inequality of bargaining power, the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994, No. 3194), which give effect to an EC Directive on Unfair Terms in Consumer Contracts, have now conferred upon the courts significant powers to regulate unfair terms in consumer contracts (see 1.6 and 17.6). In this chapter we shall give separate consideration to each of these issues and conclude by discussing the extent to which the law of contract is concerned with the fairness of the bargain reached by the parties.

Breach of Contract

Professor Treitel (1995) has defined a breach of contract in the following terms: ‘a breach of contract is committed when a party without lawful excuse fails or refuses to perform what is due from him under the contract, performs defectively or incapacitates himself from performing’. It should be noted that in all cases the failure to provide the promised performance must be ‘without lawful excuse’. Thus where the contract has been frustrated there is no liability for breach of contract because both parties have been provided with a ‘lawful excuse’ for their non-performance. Similarly, where one party has breached the contract and the breach has given to the other party the right to terminate performance of the contract, that party is not in breach of contract in refusing to continue with performance because he is given a ‘lawful excuse’ for his non-performance.

Common Mistake and Frustration

Parties occasionally enter into a contract on the basis of a common assumption which they later discover was false. Alternatively, events occur after the formation of the contract which were not within the contemplation of the parties when they entered into the contract. In these circumstances, are the parties bound to carry out their contract according to its terms, even though the events which have occurred were not within their contemplation when they entered into the contract? The answer to this question is that the courts may, in certain circumstances, release the parties from their obligations to perform. But it is very important to understand the basis of the intervention of the courts in these cases. The basis is not that the parties failed to reach agreement. These cases are not like the mistake cases which we discussed at 4.6, where one party is claiming relief on the basis that he was mistaken and that mistake negatived his consent and so prevented a contract coming into existence.

The Classification of Contractual Terms

Not all contract terms are of equal significance; some are more important than others. For example, if I were to enter into a contract to buy a new car, the make of the car, its roadworthiness and the price would be much more important to me than its colour. This fact has long been reflected in contract law in the distinction which has traditionally been drawn between a condition and a warranty.