Overview of Legal Terminology and Basic Contract Law
BASIC PRINCIPLES OF ENGLISH CONTRACT LAW
What a contract is?
Contract is probably the most familiar legal concept in our society because it is so central to the essence of our political, economic, and social life. In common parlance, contract is used interchangeably with agreement, bargain, undertaking, or deal. Whatever the word, the concept it embodies is our notion of freedom to pursue our own lives together with others. Contract is central because it is the means by which a free society orders what would otherwise be a jostling, frenetic anarchy.
The Definition of Contract
As usual in the law, the legal definition of contract is formalistic. The Restatement (Second) of Contracts (Section 1) says, “A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Similarly, the Uniform Commercial Code says, “‘Contract’ means the total legal obligation which results from the parties’ agreement as affected by this Act and any other applicable rules of law.”Uniform Commercial Code, Section 1-201(11). As operational definitions, these two are circular; in effect, a contract is defined as an agreement that the law will hold the parties to.
Most simply, a contract is a legally enforceable promise. This implies that not every promise or agreement creates a binding contract; if every promise did, the simple definition set out in the preceding sentence would read, “A contract is a promise.” But—again—a contract is not simply a promise: it is a legally enforceable promise. The law takes into account the way in which contracts are made, by whom they are made, and for what purposes they are made.
For example, in many states, a wager is unenforceable, even though both parties “shake” on the bet. We will explore these issues in the chapters to come.
Formation of a Contract
A contract is an agreement giving rise to obligations which are enforced or recognised by law.
In common law, there are 3 basic essentials to the creation of a contract:
agreement; (ii) contractual intention; and (iii) consideration.
The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. In deciding whether the parties have reached agreement, the courts will apply an objective test.
An offer is an expression of willingness to contract on specified terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed. There must be an objective manifestation of intent by the offeror to be bound by the offer if accepted by the other party. Therefore, the offeror will be bound if his words or conduct are such as to induce a reasonable third party observer to believe that he intends to be bound, even if in fact he has no such intention. This was held to be the case where a university made an offer of a place to an intending student as a result of a clerical error.
An offer can be addressed to a single person, to a specified group of persons, or to the world at large. An example of the latter would be a reward poster for the return of a lost pet.
An offer may be made expressly (by words) or by conduct.
An offer must be distinguished from an invitation to treat, by which a person does not make an offer but invites another party to do so. Whether a statement is an offer or an invitation to treat depends primarily on the intention with which it is made. An invitation to treat is not made with the intention that it is to be binding as soon as the person to whom it is addressed communicates his assent to its terms.
An acceptance is a final and unqualified expression of assent to the terms of an offer. Again, there must be an objective manifestation, by the recipient of the offer, of an intention to be bound by its terms. An offer must be accepted in accordance with its precise terms if it is to form an agreement. It must exactly match the offer and ALL terms must be accepted. An offer may be accepted by conduct (for example, an offer to buy goods can be accepted by sending them to the offeror).
Acceptance has no legal effect until it is communicated to the offeror . (because it could cause hardship to the offeror to be bound without knowing that his offer had been accepted).
The general rule is that a postal acceptance takes effect when the letter of acceptance is posted (even if the letter may be lost, delayed or destroyed. However, the postal rule will not apply if it is excluded by the express terms of the offer. An offer which requires acceptance to be communicated in a specified way can generally be accepted only in that way. If acceptance occurs via an instantaneous medium such as email, it will take effect at the time and place of receipt. Note that an offeror cannot stipulate that the offeree’s silence amounts to acceptance.
A communication fails to take effect as an acceptance where it attempts to vary the terms of an offer. In such cases it is a counter-offer, which the original offeror can either accept or reject. For example, where the offeror offers to trade on its standard terms and the offeree purports to accept. but on its own standard terms, that represents a counter-offer. Making a counteroffer amounts to a rejection of the original offer which cannot subsequently be restored or accepted. (unless the parties agree).
It is important to distinguish a counter-offer from a mere request for further information regarding the original offer.
The offer may be revoked at any time before its acceptance, however the revocation must be communicated to the offeree. Although, revocation need not be communicated by the offeror personally. if it is not communicated, the revocation is ineffective, and once an offer has been accepted, then the parties have an agreement. That is the basis for a contract, but is not sufficient in itself to create legal obligations.
Contracts which must be writing
There are several types of contracts that must be in written form. For example, contracts containing a guarantee must be in writing. A guarantee is an agreement where one party agrees to pay the debt of another individual or company in the event that the third party defaults on the debt. Contracts relating to the sale, transfer, option or lease of land should always be in writing. Another common situation where writing is required is for contracts for the assignment or exclusive licensing of certain intellectual property rights.
Authorised Signatures and Authorised Persons
One of the mistakes made by many small businesses is in obtaining the signature of the correct person on a contractual agreement. Legally, to bind a company to a contract, it must be signed by a person who has the authority to do so. This would normally be a director of the company, its solicitor, or a manager. Far too often in my experience small businesses enter into transactions sending a written contract for a signature and they failed to ask the questions to confirm that the individual whom they are dealing with is legally representing the company. It can be as easy as obtaining confirmation in the form of an email or fax stating that “Joe Bloggs” is Director of X Ltd and authorised to sign on behalf of the company.
An equally important point to note is that the name of the company is written correctly both in the agreement and on any invoices that are submitted. It may seem a small thing but a small businessman discovered to his credit that missing off “Limited” from his company name meant that he was personally liable for the debts he incurred. A court found that he was doing business in his own right as ABC Fashions rather than as ABC Fashions Limited. Such errors may seem little but they can be very costly.
When dealing with local authorities, it may be necessary to obtain the “seal” of the corporation to the contract. The seal of a local authority binds the relevant local authority, in the same way that having the signatures of the board of directors would in the case of Limited Company.
This goes hand in hand with the issue of authorised signatures, and authorised persons. In English law a minor, that is an individual under the age of 18 does not have capacity to enter into a contractual agreement. Contracts signed by drunks, the mentally ill, the certifiably insane can all be declared void by a court of law. Interestingly, minors, drunks, the mentally ill, and the certifiably insane can be legally obliged to pay for “necessary items”, such as food, clothes and water. It is however best practice to avoid dealing with such individuals as it will provide lawyers with all kinds of interesting issues, and cause an unnecessary and costly legal dilemma, for your business!
Where UAE contract law differs from English Law
There are several major differences between UAE law and the English Law.
Some of the main differences are as below:
Memorandums of Understandings (MoU’s)
Under English law and other common law countries’ legal systems, MoU’s are regarded as unenforceable. This is because a MoU is often a short, concise document, signed by parties as a pre-cursor to enter into a more comprehensive document. Courts in common law countries regard MoU’s as vague because they do not contain all the terms- only general ones.
Under the Article 141 of the Federal Law No.5 of 1985 issuing the civil transaction law for UAE (the “UAE Civil Code”), parties can agree the most essential terms in a MoU and then agree to finalise the details at a later date. The Dubai Court has the ability to enter the missing details and terms and therefore complete the contract.
In addition, UAE law can assume that if a party does not finalise the details of a contract, or is talking to third parties at the same time, then it may determine that a party is acting in ‘bad faith’ and is in breach of contract.
Therefore, under UAE contract law, parties are advised to have comprehensive agreements in place before they start any business relationship.
This is another concept which is missing from English, American and other common law countries. By law, in the UAE, there is a duty to act in good faith in all UAE contracts.
“Good faith” is, a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to that other party and to act reasonably and moderately.
Article 246 of the UAE Civil Code states
“a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith“.
Unfortunately, the law does not expressly state what the definition of “good faith” is; and it is left for the Dubai Courts to decide in each case. However, the general notion is that the law positively requires a party to consider the legitimate interests of the other party(ies) when entering into a contract.
This provision in the law has wide-reaching consequences and can have an impact on both parties if there is a dispute.
Only fraudulent behaviour constitutes misrepresentation
In English, and other common law countries, there is a concept in contract law referred to as misrepresentation. This is when one party induces the other party(ies) to enter into a contract based on a false assertion; and when the false assertion is incorporated into the contract. If this does happen, one party can sue the other party for breach of contract. The misrepresentation can either be innocent or negligent in English law.
Under the Civil Code, Article 185, UAE law states that misrepresentation is when one of the parties “deceives the other by means of fraud, by word or deed, which leads the other to consent to what he would not otherwise have consented to.”
Therefore, UAE law requires a representation to be fraudulent before it will be classified as a misrepresentation. Therefore, the standard to which the parties are held is much higher than under English law. Also, UAE law provides that if one party knows of the misrepresentation and does not say anything, he has consented to it and this will not allow him to terminate the contract.
Typically contracts, under English/common law, allow one party to terminate a contract for “without cause”. This basically allows one party to terminate if it no longer wishes to deal with the other for any reason.
UAE law specifically sets out the circumstances under which a contract may be terminated. These circumstances are limited. “Without cause” terminations are not allowed because they are contrary to Sharia law.
Read More: UAE Civil Procedure Law