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Contracts and the common law
A contract is an agreement defining the conditions under which relations between two or more people are organized. One of the most important characteristics of a contract is that failure by one party to respect its terms will give the other a right of enforcement before the appropriate court or tribunal.
The role of the common law in the area of contracts is primarily threefold:
to define the types of agreement that maybe identified as a contract; and
once an agreement is identified as a contract, to define the rules governing its application;
to establish remedies to be applied in cases of non-performance.
Unlike civil law jurisdictions, common law contract law is predominantly governed by the decisions of the common law courts. Nonetheless, important statutes have been adopted in many common law jurisdictions, for example the different Sale of Goods Acts seeking to protect consumers.
What does the term common law mean?
The term common law has a number of different meanings.
In its most general sense the term common law can be used to refer to the system of law applied in common law countries. For example, we can say that Australia is a common law country and that France is a civil law country.
Within the common law system, the term common law can be used to refer generally to the body of case law developed by the courts in the common law system.
- Finally, case law in the common law system is divided into two separate branches:
- common law case law developed by the King’s courts1; and
- equity case law developed by the Court of Chancery.
Used in this sense, the term common law is used to describe a specific branch of case law. Thus we can say that contract law has been developed primarily through the decisions of the common law courts.
Common law contract jurisdictions
Each common law country applies different contract law rules depending on its chosen social model2. Thus when we speak of common law contract law, we are not referring so much to the similarity of the rules that sometimes exists in each of the common law jurisdictions but rather to the fact that they all use the technique of the common law, namely:
an emphasis on case law Common law counties unlike civil law jurisdictions do not try to resolve disputes in advance by adopting codified rules that seek to anticipate problems that may occur. Rather they prefer through the courts to deal with problems after they have arisen. Thus, the system offers more freedom to the parties as regards their behavior (prior to the manifestation of the problem) and a more personalized application of the law when a matter comes before the courts (as their specific problem is considered by the court);
bottom-up rather than a top-down approach When ruling on issues, the common law courts tend to apply an objective rule of reason test reflecting the applicable norms in society. Thus, it can be said to be a bottom-up system developed both in response to the actual cases brought before courts but also deciding matters by reference to the general values in society as opposed to a top-down system organized around the adoption of detailed rules reflecting the priorities of a ruling technocrat class;
freedom of contract Common law jurisdictions all share a basic freedom of contract philosophy whereby people are allowed to make the contracts they wish and common law contract law will normally only apply if a contract is silent on a specific issue. Thus contracts in common law jurisdictions tend to be detailed in order to avoid intervention by the state.
Contract law in the United Kingdom
In the United Kingdom (UK) contract law has four main sources: European Union (EU) law, statute law, case law and custom. The supreme source of law and consequently contract law in the UK is EU law; however, the EU has not legislated much in the area of contract law and consequently EU law has only had limited impact. The supreme source of domestic contract law in the UK is statute law adopted by the UK Parliament; however, as in the case of EU law the effect of statute law on the area of contract law has been limited. Consequently, the most significant if not the most dominant source of contract law in the UK is case law, in particular common law case law3.
Case law Unlike civil law systems which are set out in a structured system of codes, common law contract law is largely derived from case law. There are two sources of case law in the common law system: common law case law and equity case law.
Common law case law To this day, common law case law continues to be developed from the decisions of the common law courts first established by the Norman kings in the second half of the 12th Century. Thus the common law courts are responsible for creating the main areas of law that we know today, for example, contract law or tort law4. In medieval times the law developed by the common law courts was technical in nature and frequently corrupt; moreover, the common law then as now only offered complainants5 one remedy, namely damages6. As a result of these problems, the Chancellor, the King’s prime minister and leading cleric, developed an alternative system of case law, referred to as equity case law. Equity was less legalistic system based on simpler Christian notions of right and wrong and was developed not to compete with the common law but rather to complement it; providing remedies when the common law failed to do so7. It is for this reason that the courts in contract law matters today have the discretion to either grant the common law remedy of damages or if they deem it necessary a remedy in equity; depending on what the court considers just in the circumstances. Thus, it can be said that contract law is primarily developed by common law case law; however, there has been limited intervention by equity and also by the legislative power under the heading of statute law. This has occurred primarily to mitigate the rigors of the common law, i.e. to render common law contract law less severe and more favorable to weaker parties such as consumers.
Equity case law As we have seen, the law of equity was developed to improve the common law in line with the Chancellor’s Christian values. In the area of contract law, equity primarily offers alternative remedies to the common law remedy of damages, referred to generally as equitable remedies. Although originally the common law and equity comprised two distinct systems of law, the common law and equity court systems were merged together into one court system in the late 1800s in the UK8 and by the late 1930s in the US9. As a result, courts in the common law system can either give a remedy in common law, i.e. damages or alternatively a remedy developed under equity if the court considers it morally necessary to offer such a remedy10. If there is a conflict between equity and the common law, equity case law takes precedence and thus moral notions of right and wrong are at the heart of the common law contract law system. However, it should be recalled that equity was developed to complement the common law and thus it has a limited scope of application in the area of contract law; its function is not to dominate common law contract law but rather to make it more just or equitable when it is necessary to do so11.
Statute law Pursuant to the principle of parliamentary sovereignty, the dominant source of domestic law in the UK is statute law12. Laws adopted by Parliament in the UK are referred to as Acts of Parliament and once published are known as statute law. Generally speaking the UK legislature, especially in the area of commercial contracts has largely chosen to leave the area of contract law to the courts. Moreover, even when statute law has been adopted, it tends to be broadly written, frequently lacking the detail of a codified civil law system. This results in the common law courts retaining large powers of interpretation even when an area is the subject of statute law13. For example, according to UK statute law, exemption clauses excluding liability of one of the parties for non-performance of a contractual duty must be reasonable. However, it is the responsibility of the courts to decide on the facts of each case whether a specific clause can be considered reasonable or not. Thus the courts have effectively retained control over the area even if a context of reasonability has been established by the legislature as regards the exercise of that control.
European Union law The United Kingdom joined the European Union (EU) in 1973. The supremacy of EU law over UK law was established by the European Court of Justice in the celebrated case of Costa v ENEL14 and was accepted by the UK courts in the Factortame decisions15. In the area of contract law, there has been limited EU legislation, above all aimed at extending protection for weaker contractual parties16. When such legislation is adopted at EU level, it takes priority over UK domestic law and must be applied by the UK courts17.
Custom A long established pattern of behavior or custom may sometimes be relied on before the courts as a right in law. For a custom to be considered an enforceable right it must be shown to have existed as far back as living memory and if possible from time immemorial18. Once a custom is established by law it must be respected by contract. For example, the purchaser of a house will have to respect a third party right of way through his garden even if the property was bought in freehold, i.e. free of encumbrances. More generally in the area of contract law, custom or established industry practice plays an important role. In this regard, the courts will look to commercial or industrial practice as an applicable standard when judging whether the behavior of a commercial party was reasonable or not.
Contract law in the United States
In the United States (US), contract law comes within the jurisdiction of the individual fifty US states and not the US federal state19. Thus each individual US state is free to have different contract law rules in place. In an attempt to prevent excessive variation between the contract laws of the different states, which would obviously have a negative impact on interstate business or commerce, the Uniform Commercial Code (UCC) was drafted providing the states with an optional uniform contract law model. However, it is important to note from the outset that the UCC:
is a private non-governmental document The UCC is a non-governmental and thus legally non-binding document that has been developed by academics and lawyer’s associations. The UCC represents an attempt by the private sector to offer states a harmonized contract law model based on the case law of the different US jurisdictions. The states remain free to adopt all, none or part of its terms into state law and it is only at such time that the provisions of the UCC have legal effect;
does not apply to all transactions The UCC deals primarily with personal property contracts such as sale of goods contracts, financial services transactions, the issuance of letters of credit etc20.
Most states have adopted all of the UCC while a minority of states has only adopted part of its provisions21. As the states are not bound to adopt the provisions of the UCC into their law, differences between the contract law rules of the fifty US states continue to exist22. Thus, when dealing with US companies, lawyers should not rely on the provisions of the UCC blindly23. Moreover, even though the provisions of the UCC play a dominant role in US contract law, the US courts retain important powers of interpretation in the day to day application of its provisions.
What is the effect of a contract?
A contract creates a legally binding agreement. If one of the parties to a contract fails to perform their duties, they are said to be in breach of contract. Once one of the parties is in breach of the agreement, the other party has a right to go before the appropriate jurisdiction and seek:
damages, the remedy available under the common law; or
a remedy in equity. There are a number of equitable remedies such as specific performance whereby a party is required to actually perform his duties under the contract or an injunction whereby a party may be prevented from acting in a way that is in breach of his contractual duty.
How does a contract come into effect under the common law?
In order for a contract to come into effect it is necessary to have four basic ingredients.
An offer made by the offeror.
Acceptance of the offer by the offeree.
Consideration, i.e. something of value given by each party to the other party in return for the agreement. Thus, if A sells his car to B for €5,000 the consideration provided by A is his car and the consideration provided by B is €5,000. In the case of simple contracts, if one of the parties fails to provide consideration, the agreement will not be considered as binding on the other party. As we will see, in the case of a certain category of contract, referred to as speciality contracts it is not necessary to show proof of an exchange of consideration between the parties24.
Finally, there has to be an intention to create legal relations, i.e. the parties must demonstrate an intention to be legally bound by the terms of their agreement.
Are there different types of contract in the common law?
There are two categories of contract recognized by the common law:
simple contracts. These are the most common form of contract;
speciality contracts. A specific form of contract normally only used for specific transactions.
There are also transactions in areas such as e-commerce that are subject to specific legal control, primarily in the UK as a result of legislation adopted at EU level. There is however no special form of e-commerce contract and e commerce transactions will normally be executed by way of a simple contract.
Simple contracts make-up the vast majority of contracts in common law jurisdictions and normally can be entered into either orally or in writing25. All that is required for the formation of a simple contract is proof of the existence of an offer, acceptance of the offer, consideration or value exchanged between the parties and an intention to create legal relations. Normally simple contracts do not have to be in writing; however, for a certain small number of transactions, most common law jurisdictions will require simple contracts to be either recorded in writing or at least evidenced in writing:
recorded in writing Under this requirement, the terms of the agreement entered into between the parties has to be written down. The simple contracts that have to be in recorded writing include:
contracts selling an interest in land26;
contracts in the form of bills of exchange or promissory notes27;
consumer credit transactions28;
agreements to transfer shares in a limited liability company29.
The fact of recording in writing that an agreement has been reached between the parties, even if this record of the transaction has been signed by both parties will not satisfy this requirement unless all the significant details of the agreement have been mentioned.
Case study: Ruddick v Ormston30
Facts:Ruddick distributed leaflets to house owners offering to buy their property and Ormston taking contact with him on this basis subsequently agreed to sell his flat. At the moment of this agreement, it was recorded in Ruddick’s diary the fact that they had agreed:
to sell the property; and
the price Ruddick agreed to pay.
Moreover, it was noted that the completion of the sale would occur at some time in the following seven days. However, they failed to mention a specific date for the closing, the meeting at which the transaction would actually be completed31. They both signed the document. Ormston subsequently had his flat valued and finding that it was worth twice the price he had agreed with Ruddick, decided to withdraw from their agreement. He justified his withdrawal on the basis that the agreement had not been recorded in writing as required by the relevant statutory provisions32 and thus was not a binding contract.Ruddick considered that the agreement had been recorded in writing in his diary and had been signed by both parties in line with the requirements of the Act.
Held: The Court agreed with Ormston stating that an essential term of the contract, namely the completion date, was missing from the record of the transaction in Ruddick’s diary and that this prevented the document from being considered a written contract for the purposes of LPA, 198933.
evidenced in writing Under this requirement, certain simple contracts do not have to be recorded in writing but a document recording the fact that an agreement was reached between the parties does have to be drawn-up by the parties. For this requirement to be met it is necessary that the written document record the elements considered material to the agreement; for example the names of the parties, the price etc, but it does not have to take the form of a contract. According to the provisions of the Statute of Frauds and the UCC the following contracts must be evidenced in writing:
contracts for the sale of goods involving large amounts of money34;
contracts creating a partnership;
agreements that are to be performed more than one year after being signed;
contracts guaranteeing the debts of another;
prenuptial agreements or marriage settlement agreements35.
The evidentiary requirements referred to above were established to prevent fraud. Consequently, the courts do not like to see a party relying on the provisions of the law to fraudulently avoid on technical grounds what was clearly an agreement between the parties. In other words, the courts do not wish to see the Statute of Frauds or its more recent legislative offspring become themselves instruments of fraud. Consequently, the courts have developed by way of equity the doctrine of part performance. Under this doctrine, the courts will enforce an oral agreement failing to meet statutory evidentiary requirements where:
a party can clearly prove the existence of the agreement36;
there has been part performance of the agreement37; and
in the circumstances it would be unconscionable to allow the other party to rely on the legislative provisions in question to avoid being bound by their agreement38.
Even if not required by law, it is advisable that all agreements of importance be recorded in writing. A written agreement is obviously easier to enforce as the obligations of the parties are clearly outlined. Moreover, the process of writing a contract requires the parties to focus on the details of what they are agreeing to do and thus many of the misunderstandings that so often lead to future conflicts can be anticipated and avoided.
Speciality contracts are the second category of contract recognized by the common law. One of the major characteristics of speciality contracts is that the parties do not have to show proof of consideration in order for the agreement to be considered binding. Common law countries require a small number of transactions to be executed by way of speciality contract, also referred to as an agreement under seal39 or a deed40.
- Transactions that must be recorded by speciality contract
Most contracts are entered into by way of simple contract. However, common law countries normally require a small number of transactions to be executed as speciality contracts. The following types of contract must be executed as speciality contracts in the United Kingdom:
contracts conveying an estate in land41;
agreements creating a power of attorney;
agreements creating a charge on land, for example a mortgage42.
Other types of transaction often take the form of a speciality contract but are not actually required to do so by law. In these cases, it is the parties themselves that decide to execute the agreement in this way; for example in the case of:
contracts with local authorities or government agencies43;
documents releasing a previously given security, for example in a credit transaction where property was offered as security for a loan;
documents varying a previously agreed contract already entered into between the parties44;
subsequent guarantees given for loans previously awarded by a bank will normally be executed in the form of a speciality contract in order to overcome a potential later claim as to a lack of consideration as regards the enforcement of the guarantee45.
- Formalistic requirements applicable to speciality contracts
In order to be considered as being a speciality contract, certain formalistic requirements have to be respected as regards the drafting and execution of the agreement. For example, the formula signed sealed and delivered is often used in the signing blocks of speciality contracts in order to indicate that the contract is being executed as a speciality contract. Use of this formula signals that the document is meeting the formalistic requirements applicable to speciality contracts.
Signed Signed clearly means that the parties must sign their names to the contract. Thus in order to be enforceable a speciality contract must be in writing and also the document must state that it is being executed as a deed. Some jurisdictions may also require speciality contracts to be signed by a member of the company’s board of directors.
Sealed Sealed refers to the requirement that the parties affix their seal to the contract. Most common law jurisdictions no longer impose this requirement46 and instead require that the document be either notarized before either a notary public47 or alternatively that the signature of the parties be witnessed by an independent third party, referred to as an instrumentary witness. However, contracts entered into with government departments still often include the appropriate government seal48.
Delivered Delivered means that each party must have delivered to them an original signed copy of the contract. In other words, original copies of the contract must be exchanged between the parties and this will also have to be evidenced by an independent third party witness.
Instead of using the formula signed sealed and delivered the phrase Signed as a deed/Executed as a deed is now usually used in its place. This newer formula recognizes the fact that the use of seals is no longer necessary. It is important to recall that a speciality contract is more than just a contract recorded in writing. A written contract in order to become a deed must state in the actual document that it is being executed as a deed and should also comply with the other formalistic requirements set out above.
- Differences between speciality contracts and simple contracts
Although clearly more burdensome than simple contracts as regards their form there are a number of advantages that attach to speciality contracts. These advantages explain why parties, even when not legally required to do so sometimes choose to execute their agreements in this way:
a longer prescription period The statute of limitation period49 for speciality contracts is twelve years, double the period applicable to transactions entered into by way of simple contracts50. Thus speciality contracts are often used in the case of long-term projects, for example large scale building projects;
an irrebuttable presumption of consideration As we have seen, unlike simple contracts, it is not necessary to demonstrate proof of consideration51 in the case of speciality contracts. As a result, charitable donations are often made by way of speciality contract where no consideration is being given in return for the donation52. If a charitable donation is made by way of a simple contract, under strict common law rules it would not be considered an enforceable obligation as the receiving party gave nothing (i.e. no consideration) in return for the promised donation; finally
priority Speciality contracts rank in priority over ordinary simple contracts. Consequently loan agreements often take this form in an attempt to ensure priority as regards repayment over other creditors, should the debtor be subsequently declared insolvent.
- E-commerce transactions
In response to the growth of the Internet and more specifically in e-commerce, the European Union adopted the Electronic Commerce Directive53 which has been implemented into UK law pursuant to the provisions of the Electronic Commerce Regulations (ECR), 2002. Under the ECR, customers have the right to:
- immediately receive receipts for transactions entered into over the internet;
- to change the orders they have made;
- to be given contact details of the businesses with whom they are transacting.
More generally, the ECR requires member states to facilitate the development of e-commerce transactions by withdrawing any restrictions to such commerce that might exist in their legal systems. For example, under the UK Electronic Communications Act, 200054 provision is made for the recognition of electronic signatures to allow contracts to be entered into online.
Can everyone enter a contract?
Only parties possessing the necessary capacity can enter into contracts. In most common law jurisdictions, only people over the age of eighteen55 and in sound mental health are considered as having the necessary capacity. Legally established companies with a separate legal personality are also considered as having the legal capacity necessary to enter into contracts in their own name. However, for a company to be bound by a contract, the agreement must be signed by a company officer authorized to sign on behalf of the company56.
Minors and the mentally ill are not normally considered as having the necessary capacity to enter into a contract as the law considers that they do not have sufficient understanding to appreciate the consequences of their acts. In the same way intoxicated people or people under the influence of drugs are not considered capable of entering a contract where the level of their intoxication is such that they do not understand the nature of their agreement.
What is an implied contract?
An implied contract is a contract that is deemed to exist even though the parties did not expressly agree to it. There are two types of implied contract:
contracts implied in fact;
contracts implied in law.
Contract implied in fact A contract implied in fact often results from the behavior of the parties, which behavior is considered to demonstrate an intention to be bound by contract. Let us imagine that X agrees by written agreement to supply Y with 5 boxes of paper every month for a period of two years. Normally, the contract will come to an end after twenty-four deliveries of paper. However, should X continue to deliver the paper every month thereafter and should Y continue to accept its delivery then a new implied contract will probably be considered to come into existence based on the parties’ behavior. The terms of the new contract implied by the court will normally be the same as those of the former express twenty-four month contract.
Case study: Trafigura Private Ltd v Emirates General Petroleum Corporation
Facts: The defendant company claimed that it was not bound by a contract on the grounds that the contract was signed by a person who was not authorised to represent the company.
Held: The High Court rejected this defence. In the opinion of the Court, independent of whether the written agreement between the parties was correctly signed, the behaviour of the defendant demonstrated that it intended to be bound by the terms of the contract; thus an implied in fact contract was said to exist between the parties. Consequently, the existence or not of a correctly signed written contract was considered immaterial. For the court, a contract will come into existence where:
there is evidence of an intention to create legal relations;
the terms of the agreement are sufficiently certain;
there is proof of consideration provided by both parties.
Contract implied in law A contract implied in law, also known as a quasi-contract results from the operation of the law. A contract implied by law can result either from a decision of the courts or from the application of statute law.
Case law The courts will imply such a contract to exist either to promote business efficiency57 or as a means of preventing unjust enrichment by one party over another. Let us imagine that Dr. Fred Smythe discovers Y injured and unconscious on the side of the road. He brings Y to his house and cares for him for two weeks until Y is feeling better. At the end of the two weeks Dr. Smythe presents Y with a bill for €200 and Y refuses to pay it claiming that he never asked Dr. Smythe to treat him and that thus there is no enforceable agreement between them. In such a case the courts would probably imply a contract to exist between Y and Dr. Smythe so as to prevent unjust enrichment by Y; the amount of the contract will be Dr. Smythe’s reasonable expenses incurred in the care of Y.
Statute law Statute law also implies clauses into contracts. For example, pursuant to the different Sales of Goods/Services Acts adopted in the United Kingdom58, implied protection is statutorily guaranteed in sale of goods contracts. Pursuant to the Acts, goods or services supplied under contract must be:
of satisfactory quality and correspond to their description;
fit for the reasonable purpose mentioned or intended by the purchaser or buyer. If no express purpose is actually mentioned by the buyer, the good(s) must be fit for the purpose that goods of that kind are commonly used having regard to any description given to the goods/services, the price and any other relevant facts; and
in the case of services, supplied and carried out with reasonable care and skill.
What is the difference between a bilateral and unilateral contract?
A bilateral contract is one that is based on a mutual exchange of promises, for example X agrees to sell his car to Y for €5,000. A unilateral contract is one where there is a promise by one party conditional on the as yet unpromised performance of an act by another party; it is only upon actual performance of this act that the contract will come into effect. For example, X offers a reward of €100 to anyone who finds his dog Fido and brings Fido to his home. This is a unilateral contract and if Y finds Fido and brings him back to X then at that moment a contract is said to come into existence and X must pay Y €100.
Are there any restrictions on the subject matter of a contract?
In common law countries, the parties to a contract are for the most part free to make any agreement they wish as long as the subject matter of the contract is not illegal. Where X agrees to pay Y €100 to rob Z’s house, Y will be unable to enforce payment by X as the object of the contract is illegal. In the same way, if X agrees to pay €100 to Y under the table59 in return for painting his house the contract will be considered illegal as payment under the table is an attempt to defraud the tax authorities of money and consequently considered unlawful. As a result, Y will not be able to successfully sue X for his wages even where he painted the house as the agreement will be considered void ab initio60 and thus has no existence in the eyes of the law.
Depending on its legality, a contract can be classified in a number of different ways by the courts.
Enforceable An enforceable contract is one that is valid and meets all the requirements of a legally binding agreement.
Unenforceable An unenforceable contract is an agreement between the parties where one or some of the ingredients necessary for it to be binding are not present; for example, an agreement without consideration. In this case there is an agreement between the parties but it is not considered to be one that is enforceable in law.
Void A void contract is one that is validly constructed, i.e. all the ingredients necessary for a contract are present but the subject matter of the agreement is not considered valid; for example an illegal contract. When a contract is void it is said not to exist in the eyes of the law.
Voidable A voidable contract is a contract that is binding on one of the parties to the agreement while the other party remains free to enforce it or not. For example, if a record company enters into a contract with X a fourteen year old singer, the contract will be considered voidable. Normally someone under the age of eighteen is not considered as having the necessary capacity to enter into a binding contract; however, X may choose to participate in the agreement after receiving independent legal advice. Thus the contract is void from the point of view of the record company which will not be able to enforce its terms; however, the minor X may either ignore the agreement or alternatively decide to respect its terms; thus the agreement is said to be voidable.
In the common law world contracts can nearly be compared to a form of private law whereby the parties undertake certain obligations in anticipation of certain rewards. Contracts can be distinguished from simple agreement by the fact that they are enforceable in law and thus allow the parties certainty in their business dealings. Unlike in many civil law countries, the parties are more or less free to enter into the contract of their choice and interference by the state is limited.
All words in bold in the text are translated
As English is now the recognized language of business many commercial contracts are drafted in English. Thus it is necessary to look closely at the question of drafting contracts in English and to consider in detail the different contract clauses that are used by common law lawyers. However, prior to doing this, it may be interesting to first recall some basic points that should be kept in mind when negotiating and drafting contracts in English.
What is the purpose of a written contract?
Every contract has the same purpose:
to describe with as much precision as possible the actual meeting of minds that has occurred between the parties to the agreement.
Text is translated
Given the limitations of language, this ambition is of course extremely difficult if not impossible to accomplish but it must remain the aim of all lawyers.
What is the general role of the drafting lawyer?
In order to draft a contract that correctly encapsulates the agreement between the parties the lawyer must have a clear understanding of what the parties wish to do. Thus, the duty of the lawyer is to:
first talk to his client and arrive at an understanding of the circumstances surrounding the proposed agreement and to find out what exactly the parties seek to achieve under the agreement;
advise his client of the legal consequences of entering into the agreement described by the client; and finally
draft a contract document reflecting the wishes of his client. When drafting the contract questions will come up requiring clarification from the client. The lawyer should think of including these questions in the draft contract document at the location where they arise. In this way, the lawyer can subsequently go through the contract with the client knowing that all outstanding questions and issues have been brought to the client’s attention.
What is the role of the lawyer in the contract negotiations?
The role of the lawyer in the negotiation of a contract is to advise his client of the legal consequences of the different choices the client may wish to make. It is not to tell the client what he should do. A lawyer is a legal adviser, not a general adviser and his advice should be limited to legal matters. It is not the business of the lawyer to give advice on general business matters as he is not sufficiently informed or qualified; the lawyer is a specialist in law and should limit his involvement to legal matters.
What should be the aim of the lawyer when drafting the contract?
As we have seen, the function of the drafting lawyer is to define the meeting of the minds between the parties in such a way that it is understood in the same way by all those who subsequently read the contract. In this regard, the lawyer seeks to achieve two aims, namely that the contract:
reflects the actual agreement between the parties and in particular the aims of his client; and
is understood in exactly the same way by all those who will subsequently have to interpret the agreement, whether it is the parties or any subsequent judge or arbitrator.
Thus, when drafting a contract, a lawyer after writing a clause should always ask himself the following question:
When read with the other clauses in the contract, does the clause reflect the client’s wishes and would a court interpret it in the way the client wishes?
Text is translated
If the answer is yes, then the lawyer has performed his duty to his client. If not, in the event of a subsequent dispute between the parties, the client will obviously not be happy with his lawyer. The drafting lawyer must at all times try to avoid ambiguity in his language. This is very difficult to achieve as language by its nature is frequently ambiguous.
Communication is vital
The more communication there is between a client and his lawyer the more the lawyer will understand what the client wishes to achieve and thus the contract will better reflect the state of mind of the parties to the agreement. As we have seen, one of the basic problems for a lawyer is to understand what it is the client really wants to do. Indeed, frequently the client is not sure himself of what exactly he wants to do and in reality is probably looking for the best deal possible. It is only by talking to the client about every aspect of the agreement that the lawyer begins to understand what his client really wants and perhaps more importantly what he does not want.
Where possible use model/precedent contracts
A lawyer rarely writes a contract from scratch and usually will base the contract either on a model generic contract or if possible on a similar previous agreement that the client has already entered into. Thus, the first question a lawyer should ask is whether the client has already entered into a similar agreement with anyone else; if yes the lawyer should secure a copy of this agreement. If there is no existing agreement, the lawyer should read through a similar generic model agreement with his client so as to find out what clauses are acceptable and unacceptable.
Avoid legalese where possible61. Sentences should be short and excessive use of legalistic phrases such as herein, thereto etc. should be avoided, especially by the non-mother tongue English speaker62. Plain English is far less likely to lead to ambiguities and will be more easily understood by judge and jury alike. Obviously, technical language used by the industry in question should be relied upon but its use should be checked with the client to ensure that it is correct.
What to do with pronouns – him and her
Where possible draft the contract without reference to gender. For example, consider the following sentence:
the SUPPLIER63 must supply his DISTRIBUTOR every month
Text is translated
To avoid the gender reference: “his”, it is advisable to use “the”
the SUPPLIER must supply the DISTRIBUTOR every month
Text is translated
Where the use of a gender cannot be avoided, traditionally “he” is used when faced with a choice64. However, in the increasingly politically correct Anglo-Saxon world some chose to use both, for example:
the SUPPLIER must supply his or her DISTRIBUTOR every month
(s)he must supply the DISTRIBUTOR every month65
However, generally speaking pronouns should be avoided as they can frequently lead to ambiguity. Take the following sentence as an example:
The AGENT shall forward to the PRINCIPAL all GOODS not repaired. He shall not be liable for their repair. Neither shall the PRINCIPAL be liable for ….
Text is translated
From this sentence one cannot be sure whether it is the Principal or the Agent who will not be liable for the repair of goods. To avoid this it is always better to repeat the subject’s name. For example:
The AGENT shall forward to the PRINCIPAL all goods not repaired. The AGENT shall not be liable for their repair. Neither shall the PRINCIPAL be liable for ….
Text is translated
Draft in the present tense
Although a contract creates obligations and duties that will apply to future relations between the parties, it should nonetheless be drafted in the present tense. This is because a contract will apply in the present tense. For example, let us consider the following phrase:
If the SUPPLIER will be unable to supply the DISTRIBUTOR every month, the distributor will have the right to bring the agreement to an end
Text is translated
It is simpler and clearer to draft this sentence in the present tense
If the SUPPLIER is unable to supply the DISTRIBUTOR, the DISTRIBUTOR may bring the agreement to an end
Text is translated
Use headings and organize the contract in a clear logical manner
When drafting a contract, a lawyer should clearly specify in the title of the document not only that it is a contract but also the type of contract it is; for example, “Exclusive Agency Contract”. This helps to put the status of the document beyond doubt and thus prevents the other party later claiming that the document is only a letter of intent66 or a proposal and that consequently it is not binding.
In the same way, each section of the contract should also have a separate title and similar sections should be grouped together so that the contract can be read in a logical organized manner. Each clause and sub-clause should be clearly numbered and there should be a table at the beginning of the contract outlining its content thereby allowing the agreement to be easily navigated. The contract should resemble a series of falling dominoes each clause leading irresistibly to the next.
This organization is all the more necessary as Anglo-Saxon contracts are often quite long. The length of Anglo-Saxon contracts reflects the relative non-involvement by the Anglo-Saxon state in commercial contractual matters and thus the consequent need for the parties to anticipate and outline in detail the rights and protection that they wish to secure under the agreement67.
Which party’s lawyer drafts the contract?
Normally the party with the most leverage, i.e. the more influential stronger party, will instruct his lawyer to draft a preliminary version of the agreement. The first draft is then sent to the other party. Thereafter, a meeting(s) is held between the parties and they begin to negotiate the agreement based on the preliminary first draft. Thus, the first draft of the contract defines the context of the subsequent negotiations and consequently, drafting the first version of a proposed agreement confers a definite advantage. Consequently, where possible, one should always offer to draft the first preliminary version of the agreement. Some types of contract carry a presumption as to which party will draft its terms. For example, lenders write loan agreements, employers draft employment contracts but this is just a reflection of the obvious negotiating strength or the superior bargaining position of lenders and employers.
What does the non-drafting lawyer acting for the other party do?
Once the lawyer for the stronger party has written the first draft of the agreement and has approved its terms with his client, it is then sent to the other party’s lawyer. Obviously, upon receipt of the contract the first thing for the lawyer should do is read it. A good tip is to separate the definitions page(s) from the main contract document along with the schedules; this allows the reader to easily refer to them each time they are specifically mentioned in the contract68. It is also recommended to first read the agreement entirely from start to finish without interruption taking the time only to highlight those areas presenting a possible problem. This allows a full understanding of the document in its entirety. Once this is done, then with this general knowledge, one is much better equipped to go back to consider the highlighted problem areas.
Once the lawyer has read the contract and made his comments, the client should be either invited to the lawyer’s office in order to go through the contract page by page or alternatively the contract should be forwarded to the client accompanied with the lawyer’s comments on each clause. Then the client should take a position/reach a decision on all the issues raised by the lawyer and a revised version of the contract taking the client’s comments into account, sometimes called a mark-up, should be forwarded to the other party once it has been approved by the client. Rather than merely commenting or rejecting certain clauses in the mark-up document, it is advisable to insert suggested alternatives.
It is important for the lawyer to keep an organized file
Once the terms of the contract are agreed then a final version of the contract is drafted and signed in duplicate by each of the parties. Prior to closing the file, the lawyer should ensure that it is in order and draft a concluding memo highlighting any issues that may be considered of importance in the future.
The file is the lawyer’s official record of what has occurred between the parties and of the advice the lawyer has given to his client. From the moment the client first contacted the lawyer, a copy of every communication along with all the different versions of the draft contract should be kept in the file; moreover a record summarizing the content of important phone calls should also be kept. In this way if there is a difficulty as regards the application of the contract, the file is the lawyer’s witness as to what advice was given and what happened during the negotiation of the deal. A comprehensive, organized and clearly presented file is the lawyer’s friend in the case of subsequent disputes.
All words in bold in the text are translated …..
1 One of the first common law courts developed was called the King’s Bench and today the leading first instance common law court is the Queen’s Bench Division of the High Court.
2 To a certain extent the term common law country is misleading as it can be applied to the legal system applicable in the Pakistan or Canada; obviously the legal system in these countries is different. The term common law above all is used not so much to describe the content of the law, but rather the technique used by the common law, for example the primary role given to case law.
3 That is case law developed by the King’s common law courts, namely today the Queen’s Bench Division of the High Court.
4 With the later statutory intervention by the Parliament.
5 In the Anglo-Saxon system the person who brings an action may be referred to as either the “plaintiff” or the “complainant”; in the United Kingdom the term complainant is used.
6 This continues to be the case and the only remedy available at common law is damages. If a party is seeking any other remedy it is necessary to apply for a remedy in equity.
7 It is important to appreciate that equity does not compete with the common law contract system but rather seeks to make it a better system by providing remedies and solutions where the common law fails to do so.
8 Judicature Acts, 1873, 1875.
9 Federal Rules of Civil Procedure, 1938. The states had earlier merged their common law and equity law court systems although a minority of US states such as the State of Delaware continue to have separate common law and equity law systems.
10 However, decisions to grant a remedy in equity cannot be made by jury although a jury has the power to make an award of damages.
11 If equity is applied too broadly, the system of contract law would become overly influenced by judges’ personal opinions of right and wrong. In this regard, equity is not so much about helping individuals but rather is more concerned with keeping the overall character of the common law contract law moral and just.
12 Since the Glorious Revolution in 1688 sovereignty in the United Kingdom (UK) has been vested in the Parliament.
13 Moreover, the common law courts have developed rules of interpretation that allow them to decide what they consider the Parliament wished to say, rather than considering what the Parliament actually said! For example under the purposive theory (teleological rule of interpretation), the courts look to see the purpose behind the legislation where they consider a specific term of a statute to create an ambiguity. In this way, most common law courts resist applying a literal interpretation to statutory provisions.
14 Costa v ENEL, ECR 585, C 6/64.
15 R v Secretary of State for Transport, ex parte Factortame, there were a number of decisions spread out over a decade but the two most important decisions date from the early 1990s, referred to as Factortame I and Factortame II ((1991) 1 AC 603, ECJ C-213/89).
16 Continental European systems tend to prioritize protection over freedom of business. See for example EU Directive Unfair Consumer Contract Terms Directive, 93/13/EC, OJ L95, 1993 implemented into UK law by the Unfair Terms in Consumer Contracts Regulation, 1999, SI, 1999/2083; or Council Directive 86/653 on the coordination of member state laws in relation to self employed commercial agents, OJ L382/86.
17 As we saw, in the United States, contract law is effectively developed by each of the individual US states.
18 Time immemorial is said to date from 1189. The custom must be reasonable and not offend fundamental notions of right and wrong. Also, the right claimed under the custom must be in constant and continual use and exercised as of right and not exercised by way of stealth.
19 Although clearly under the supremacy principle of Article 6 of the US Constitution all contracts have to respect the provisions of federal law, for example to be non-discriminatory.
20 The UCC was adopted in 1952 and has been revised on numerous occasions. It represents just one of a number of attempts to harmonize laws coming within the competence of the individual US states so as to better facilitate interstate commerce. It does not apply to real property (immoveable property) transactions.
21 States such as Louisiana have probably proved less enthusiastic as regards incorporating all the aspects of the Code as a result of State’s civil law background. Thus, Louisiana applies its own state law provisions to sales of goods contracts. The UCC is also applied in Puerto Rico, Guam, US Virgin Islands and the District of Columbia.
22 Differences can exist above all as to which version of the UCC is applied in a particular state. This results from the fact that the UCC is under constant revision and states do not always immediately adopt new provisions into their state law.
23 As contract law comes within the jurisdiction of the individual fifty US states rather than the federal jurisdictions, there are in all fifty one jurisdictions covering the area of contract law in the US system; as mentioned in the text, the UCC is only a recommended contract law model and is not binding on the states unless they choose to adopt it into their law.
24 See discussion immediately below.
25 It is a principle of the common law that there is no difference between the written and spoken word.
26 See for example section 2 of the UK Land Properyy Act (LPA), 1989 “a contract for the sale of … an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed into one document”.
27 UK Bills of Exchange Act, 1892.
28 UK Consumer Credit Act, 1974.
29 UK Companies Act, 1985.
30 EWHC 2547 (ch (chancery division)), 2005.
31 The closing is the meeting at which the papers necessary for a transaction are signed and exchanged. The closing is also referred to as the completion date and in the case of Ruddick v Ormston it was the date at which the conveyance or transfer of the title in the property would occur.
32 Land Property Act (LPA), 1989, op. cit..
33 In this case Ruddick had only offered Ormston half of the actual market value of his apartment and thus there was a suggestion of improper dealings. The Court however did expressly state that they did not consider the transaction unconscionable and that Ruddick owed no duty to Ormston to inform him of the actual value of the house. Nonetheless, perhaps on other facts where there was no suggestion of unfair dealing the Court might have reached another decision. In support of Ruddick v Ormston, see Patrick Franci v F Berndes Ltd. & Others (LTL 19/12; 2011 EWHC 3377 (ch) 2011); in this case, the purchaser was not identified in the record of the agreement which also did not include an actual obligation to buy.
34 For example, in the US the UCC provides at section 2 that contracts for the sale of goods for an amount exceeding $5,000 must be in writing. Many US states instead of applying the $5,000 threshold established by section 2 continue to apply the older section 2 threshold of $500 to transactions involving consumers and thus there is a lack of harmonization on this question between the different state laws.
35 Marriage settlement agreement, is an agreement where a promise to marry is supported by a payment of a settlement in consideration thereof. Unlike in some civil law jurisdictions there is no state imposed duty for the parties to a marriage to enter into a marriage contract and the existence of a marriage contract, a prenuptial agreement remains relatively rare in Anglo-Saxon jurisdictions with the exception of marriages where one of the parties is particularly wealthy.
36 Clearly the burden of proof is on the party claiming the existence of a binding agreement.
37 As regards proving the existence of the agreement, it has not been established clearly by case law whether the actual part performance itself can be relied on as proof of the existence of the agreement or whether proof of the agreement and part performance are both required trigger application of the doctrine. It is suggested that depending on the facts of the situation, part performance in itself will allow the application of the doctrine by the courts, where it clearly shows an agreement exists between the parties and where failure to recognize the existence of the agreement by the courts would be unjust.
38 See for example, Tadellaca Ltd. V PDL Industries, 3 NZLR (88) HC, 1992.
39 A seal is a wax imprint that used to be one of the formalistic requirements for speciality contracts and as a result such contracts were referred to as contracts under seal.
40 The word deed can mean two things:
it is a general name used to describe a speciality contract/contract under seal;
a specific type of speciality contract used to convey land. It is for this that the documents proving ownership of property are often referred to as the deeds of the property. A contract conveying title in land must be executed as a speciality contract and thus more generally speciality contracts are sometimes incorrectly referred to as deeds; incorrectly as in fact a deed is only a specific type of speciality contract used in land transfers.
41 Including leases of over three years, LPA, 1989 (UK).
42 Where the mortgagee is to have a subsequent power of sale in the case of non-repayment of the loan, LPA, 1925, section 104.
43 This is particularly the case when such projects are large scale projects such as road building.
44 This is to ensure that there is no difficulty with the requirement of consideration as regards the new contract terms, see discussion of consideration in chapter 4.
45 Here bank A makes a loan to X and subsequently after making the loan to X asks Y to act as a guarantor for X as regards the loan. If Y does so, he might later argue that his guarantee is not binding as he received no consideration from the bank in return for his promise to guarantee as the bank loan to X was made prior to his decision to give the guarantee. To prevent this, the bank will execute Y’s guarantee agreement as a deed, thereby doing away with the need for consideration in support of the promise.
46 See the Law of Property Act, 1989 in the UK.
47 A public official nominated by the government authorities to act as an official witness.
48 The letters LS are sometimes marked at the end of a contract at the place where the seal was previously affixed to indicate the document is being executed as a deed. L.S.: Locus Sigili – the place of the seal.
49 Also refered to as the prescription period.
50 The prescription period for simple contracts is six years.
51 Consideration can be described as an exchange of value, for example the exchange of money between the parties. With the exception of speciality contracts, failure to show the existence of consideration between the parties will prevent a binding contract coming into effect.
52 This is because the party receiving the donation will be giving nothing in return and thus if the promise to donate was entered into by simple contract, there would not be the necessary consideration to make the agreement binding in law.
53 200/31/EC, OJ L 178/2000.
55 Over twenty one years in some common law jurisdictions.
56 This will normally be set out in the Company’s articles of incorporation and a company resolution to this effect will be adopted, see discussion in chapter 3.
57 See discussion of the Moorcock decision in chapter 6.
58 Similar protection is available under the provisions of the UCC, for example article 2, section 315 UCC concerning merchantability of goods in sale of goods contracts.
59 Under the table: usually an agreement to pay in cash so as to avoid applicable taxes.
60 Ab initio – from the beginning.
61 The term legalese describes heavy legal language/terminology such as heretofore, hereinbefore etc…
62 This is because it is not always easy for the non-English speaker to appreciate the full extent of their meaning.
63 SUPPLIER is written in capital letters to indicate that it has been defined in the definitions section of the contract.
64 If one of the parties, for example, the supplier is a company the appropriate pronoun to use is “it”.
65 This problem does not necessarily exist in other languages.
66 See discussion in Chapter 3.
67 As otherwise they will not be protected.
68 Each time reference is made to the schedule or to a defined word, take the time to immediately look at the definition of the word or to read the schedule even if you have already done so before in the context of another reference.