Contract Law


Important Disclaimer: These notes are a general statement of the law – there may be errors or omissions. I do not accept responsibility for any loss resulting from reliance on them – please see my full disclaimer

Should I have standard terms of business?

If you do not have specific terms of business, any contract you make to supply goods or services will be governed by general contract law. This may not have the effect you want.

Being subject to general contract law would mean, for instance, that:-

  • ownership of any goods supplied passes to the buyer when they are supplied. – a seller may want to retain ownership until the goods are paid for
  • the need to insure any goods supplied passes to the buyer when ownership passes – a seller may want to transfer risk when the goods are supplied
  • payment is due on delivery – special payment terms may be more appropriate
  • liability for shortfalls or defects may be effectively unlimited

Having terms of business gives a supplier or a buyer an opportunity to define each party’s obligations so that each party clearly understands what is expected of them and what to expect in return.

Although unwritten contractual terms are legally enforceable, they are difficult to prove whilst standard written terms are easily provable.

What can I include in my Terms of business?

For example –

  • If you are a supplier of goods or services you can include terms that:-
  • Entitle you to charge interest on late payments at a rate you decide.
  • Retain ownership of any supplies until you have been paid.
  • Limit your liability for claims arising from some mistakes or shortcomings.
  • Define your responsibilities to better manage customer relations.
  • Retain copyright in any creative work you provide.

If you are a buyer of goods or services you can include terms that:-

  • Entitle you to claim defined compensation for late delivery.
  • Transfer ownership of any supplies on delivery.
  • Entitle you to reject an order when delivery is late or incomplete.
  • Define your supplier’s responsibilities.
  • Acquire copyright in any creative work done for you.
  • Cause matters that will seriously effect your business to become of the essence so that a breach becomes a fundamental breach entitling you to rescind.
  • Inform the seller of the specific consequences which will flow from a breach for which you will require compensation.

How binding are Terms of business when I am buying or selling?

You can include unreasonable or onerous terms but these may be overturned if disputed in court.   So to avoid unnecessary disputes it is better not to include such terms.

Any reasonable terms are fully binding provide they are incorporated before an agreement is reached.

Neither party can impose terms of business after an agreement is reached.   It is vital that any terms are incorporated at the earliest stage.

What is a breach of contract?

If an agreement is not honoured a breach of contract has occurred.

If a breach is sufficiently serious it may be a fundamental breach entitling the innocent party to rescind   the contract.   But compensation would then not be payable.   For example it is possible to reject a car on delivery if there are severe problems with it.

Non fundamental breaches entitle the innocent party to financial compensation.   In order to claim compensation the innocent part must be able to quantify their loss and must mitigate any damage.

If a contract cannot be performed through neither party’s it will probably be frustrated   and neither party would normally be entitled to compensation.

There are different consequences and remedies for breaches of different types of contractual provision: misrepresentations (which themselves can be innocent or fraudulent ), breaches of warranty , breaches of condition , and so on.

This can be an extremely technical and complex area of law, which needs specific advice on the particular facts.

What should I do if I can not honour a contract?

Be honest – it is usually the cheapest escape! If you are a supplier it will also give you the best chance of keeping your customer.

If you are the buyer, the most common way of not honouring a contract is by failing to pay.   There is specific advice about how to deal with this problem under debt collection and insolvency.

For suppliers, owning up straight away forces the buyer to mitigate their loss so reducing any claim against you.   Offering an alternative or different arrangements may also have the effect of mitigating the loss – even if the customer refuses they will not be able to claim compensation for more than the difference in value between the original order and your alternative.

Handled with care this situation can often be turned into an opportunity to impress customers and strengthen their loyalty.

If you do not tell a customer about a problem as soon as you can, then you may not give them enough time to make alternative arrangements and this may lead to a higher claim against you.

You must be prepared to pay your customer fair compensation.   If you dispute this when you are at fault then you risk paying legal bills in addition.

What should I do if the other party does not honour a contract?

Write to the other party confirming the details of their breach and any agreement reached between you as to an alternative.   If you haven’t agreed an alternative you should take reasonable steps to minimise your loss and keep the other party informed in writing of the steps you are taking.

You will be entitled to compensation being all financial losses that directly flow from the breach of contract and which were reasonably foreseeable (or specified) at the time the contract was made.

You will not normally be entitled to compensation for inconvenience or upset and you will have to clearly quantify and prove the amount you have lost.   You will need to be able to justify your choice of any substituted supplier if more expensive.