Rules of Contract Law (AQA A-Level Law): Revision Notes
Rules and Principles
Contract law is assessed on Paper 3A of the AQA A-Level Law examination. It is an area of private law concerned with legally binding agreements between parties, which may involve:
- One person and another person
- One person and a business
- A business and another business
This note covers the fundamental rules and principles that govern contract law, including formation, terms, vitiating factors, discharge and available remedies.
Formation of a contract
What is a contract?
A contract is an agreement between two parties which is binding in law and therefore enforceable in court. When a valid contract is formed, both parties acquire legally enforceable rights. If either party fails to fulfil their obligations under the agreement, they may be in breach of contract.
Breach of contract occurs when a party fails to carry out any of their obligations under the agreement, or when they perform their obligations inadequately or incorrectly.
In civil law, when a contract is breached, the injured party (claimant) may seek one of two outcomes through the courts:
- An order requiring the other party (defendant) to perform the agreement
- Compensation for losses suffered as a result of the breach
Requirements for valid formation
To prevent the courts being overwhelmed with cases about broken promises, contract law has established clear requirements that must be satisfied before a binding contract exists.
The Three Essential Elements for Valid Contract Formation:
- Intention to create legal relations - the parties must intend their agreement to be legally binding
- Valid offer and acceptance - there must be a clear offer made by one party and an unequivocal acceptance by the other
- Consideration - something of value must be exchanged to support the agreement (normally the price paid for goods or services)
Not every agreement we make in daily life creates a legally enforceable contract. Agreements between family members or friends often lack the intention to create legal relations, whereas commercial agreements typically demonstrate such intention.
Contract terms
Nature of contract terms
Contract terms are the individual statements made by the contracting parties which form the content or subject matter of the contract. These terms define what each party has agreed to do.
Example: Simple Contract Terms
If Jamil agrees to sell his electric scooter to Kate for £500, the basic contract terms would be:
- The item being sold is an electric scooter
- The purchase price is £500
Once agreed, the terms become the binding part of the contract. Each party must perform their obligations according to these terms for the contract to be fulfilled.
Breach scenarios:
- The scooter provided is actually a non-electric push scooter (not as described)
- The price is increased to £600 after acceptance (different from agreed terms)
Types of terms
Contract terms can be categorised by their source:
- Express terms - explicitly stated by the parties themselves during negotiations
- Implied terms - not expressly stated but presumed to form part of the agreement based on the parties' intentions, custom or previous dealings
- Imputed terms - imposed by operation of law, such as statutory terms under consumer protection legislation
Classification by importance
Terms are also classified according to their significance to the contract:
Critical Distinction: Conditions vs Warranties
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Conditions - fundamental terms that go to the root of the contract. Breach of a condition gives the innocent party the right to terminate the contract AND claim damages
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Warranties - lesser terms that are generally descriptive in nature. Breach of a warranty only gives rise to a claim for damages, NOT termination
Vitiating factors
What are vitiating factors?
Even when a contract appears to have all the necessary elements for valid formation (offer, acceptance, consideration and intention), there may still be hidden defects that affect its validity. These defects are called vitiating factors.
Vitiating factors can invalidate a contract even when both parties initially believe they have entered into a binding agreement and are satisfied with its terms.
Effect of vitiating factors
Vitiating factors operate through two mechanisms:
Understanding Void vs Voidable Contracts:
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Void contract - the contract was never valid from the outset and has no legal effect
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Voidable contract - the contract is valid but may be set aside (avoided) at the option of one of the parties
The distinction is important: a void contract is treated as if it never existed, whereas a voidable contract remains valid unless and until the affected party chooses to avoid it.
Discharge of a contract
What is discharge?
Discharge refers to the ending of a contract. When a contract is discharged, the parties' obligations under it come to an end.
Methods of discharge
Discharge by performance
In the majority of cases, contracts are discharged when both parties successfully complete their obligations under the contract. This is the normal and intended way for contracts to end.
Discharge by frustration
A contract may also be discharged through frustration. This occurs when the contract cannot be performed due to events outside either party's control. When a frustrating event occurs, the contract terminates automatically.
Limits of the Frustration Doctrine:
The doctrine of frustration has limits and cannot be used simply because performance has become more difficult or expensive than anticipated. The intervening event must fundamentally alter the nature of the contractual obligations.
Remedies for breach of contract
When a breach of contract occurs, the law provides remedies to compensate or assist the injured party. There are two categories of remedy: common law remedies and equitable remedies.
Common law remedies
Damages are the most frequently awarded remedy in contract law. They consist of a monetary payment designed to compensate the injured party for losses suffered as a result of the breach.
Remedy is defined as a way of providing a solution to a breach of contract.
Key Feature of Common Law Remedies:
When damages are awarded at common law, they are granted as of right - meaning that if the claimant proves their case, they are automatically entitled to receive damages.
There are three basic types of damages available under common law:
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Unliquidated damages - the amount is not predetermined and must be assessed by the court based on the actual loss suffered
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Liquidated damages - a genuine pre-estimate of loss agreed by the parties and specified in the contract itself
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Quantum meruit - a reasonable sum of money to be paid for services in contracts where an exact sum was not stipulated. The term means "as much as is deserved".
Equitable remedies
Equitable remedies have developed to address situations where common law damages are inadequate or inappropriate. Unlike common law damages, equitable remedies are discretionary - the court has the power to decide whether to grant them and is not obliged to do so even if the breach is proven.
The two main equitable remedies in contract law are:
- Specific performance - a court order requiring the party in breach to carry out their contractual obligations
- Rescission - the contract is set aside and the parties are restored to their pre-contractual positions
Discretionary Nature of Equitable Remedies:
The discretionary nature of equitable remedies means that judges will consider factors such as:
- The conduct of the parties
- Whether damages would be an adequate remedy
- Whether it would be fair and practical to grant the equitable remedy sought
Key Points to Remember:
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A contract is a legally binding agreement between two parties that can be enforced through the courts
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Valid contract formation requires three elements: intention to create legal relations, offer and acceptance, and consideration
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Contract terms may be express (stated by parties), implied (presumed), or imputed (imposed by law)
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Vitiating factors are defects that can invalidate contracts, making them either void (never valid) or voidable (can be set aside)
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Contracts are normally discharged by performance when both parties fulfil their obligations, but may also be discharged by frustration due to unforeseen events
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Common law remedies (damages) are available as of right, while equitable remedies (specific performance, rescission) are granted at the court's discretion