Commercial Management ± 7

Introduction to Contracts
David Stupples Professor in Engineering Systems School of Engineering and Mathematical Sciences


Module objectives

By the end of this module you will understand: ± The Basics of Games (1) ± Games theory extended (2) ± How to Negotiate successfully using gaming (3 and 4) ± Tendering and Pricing (Applying games theory) (5) ± Preparing the proposal (6) ± Introduction to Contract Law (7) ± Contract Example (8) ± Revision (9)

Contract ± basic format The proposal and negotiation form an essential part of the contract ± a typical format could look like this Schedules a) Final technical proposal b) Prices c) Project timings d) Delivery schedule e) Key staff f) Acceptance criteria g) Warrantees h) Variation Procedures i) Dispute Procedures j) Quality Management Contract Main Body ± Terms and Conditions (T&Cs) Schedules to the Contract «. contracts vary considerable 3 .this is only an example.but it is indicative! .

g. or can be voidable. Speciality contracts are under a seal and signatures are witnessed.Law of Contract ± some basics A simple legally binding contract comprises:  an offer ± must be clearly defined. e. sealed and delivered¶. defined in a specification  an acceptance ± it must be unconditional ± ie. 4 . after negotiations  plus consideration ± paying or promising to pay for the supply of services or goods A simple contract can in writing or an oral agreement. they are not valid until delivered ± hence µsigned. Contracts can be found to be void.

5 . you are free to make any bargain you wish.Law of Contracts In the commercial world. but when you have made your bargain. provided that it does not conflict with the public interest. you must carry it out or compensate the other party for the bargain they have lost.

 Criminal law. formal relationship between people. but also covers criminal negligence and negligence. 6 . even those with whom we do not have a formal relationship ± can be described to cover any wrong doing for which an action for damages may be brought. The latter imposes a duty of care not to infringe the rights of people. The former seeks to regulate the agreed.Types of Law English law is divided into two empirical categories:  Civil law ± has two main elements: the law of contract and the law of tort.

 Statute law ± This is made by parliament as its sees fit. or make new laws in new areas. or case precedent (including decisions on statutory law)  Equity ± This is a system developed as a result of inadequacies of common law. Equity adds to common law through new rights. Results from not having a written constitution.  EU law ± directives pass into English law by statute  Canon law ± made by the Church of England but based on Roman law. better procedure and better remedies.  Judicial precedent ± where a matter of principle has been decided by one of the higher courts it becomes a precedent. Constrained be the EU.Sources of Law English law is derived from a number of sources:  Common law ± developed by previous judgements. overrule case law. 7 . It can repeal previous statutes.

 Judicial Committee of the House of Lords  European Court of Justice. 8 . and Court of Appeal.  Tribunals  Arbitration  Privy Council. Restrictive Practices Court.Structure of the Courts  County courts ± deals with all types of civil action with financial limitations. Chancery Division. Divisions that deal with contract law include Queens Bench Division.  High court ± empowered to deal with any civil matter.  Crown court ± does not normally deal with civil cases.

Law of Contract To consider contract law we should understand:  offer and acceptance  the consideration  functions of the contract  validity of the contract  the sources of mistakes in the contract  duress and undue influence  terms and representations termination of obligations  remedies 9 .

 An offer is rejected if the offeree makes a counter offer  Once acceptance is made.  The offeror may revoke the offer any time prior to acceptance. but if it is made by any other means.Offer and Acceptance A contract results from an offer and acceptance. no new terms and conditions can be introduced unless mutually agreed  The terms and conditions are stated in the offer and acceptance rather the unexpressed intentions of both parties  Until there is an agreement either party may withdraw from the incomplete transaction. The following conditions apply:  An offer or acceptance made by letter is valid from the moment it is posted. from the moment it is received. 10 .

11 . ie.  Unilateral contracts ± The offeror is deemed to have included in the offer a term providing that the described performance by the offeree will be a sufficient acceptance and communication is not necessary.Offer and Acceptance Special types of offer and acceptance include the following:  Tender ± a tender is an offer to supply or purchase goods or services. in competition. Submitting a tender cannot compel the person seeking a tender to accept it or any other tender.  Letters of intent ± used to set out the terms of agreement as negotiated ± work sometimes starts based on this but it is a risk. A bid is a process of an auction.  Bid ± The law surrounding bids is similar to tenders. The process of tendering does not constitute an offer to proceed to acceptance of any tenders.

ie.The Consideration A contract must involve a consideration or payment. defined as µan act. Consideration is governed by three main elements:  Valuable consideration ± an economic value  Sufficient consideration ± there must be some economic value but it might not be realistic  Movement of consideration ± consideration must move from the promise. and is said to be invalid. naked contract. or promise by one party with another that constitutes the price for which they buy the promise of the other¶ A contract without consideration is said to be nudam pactum. forbearance. payment follows delivery 12 .

A contact should define how risk is shared between parties  Coping with problems ± a contract should define how the more predictable problems are dealt with 13 . and how their performance may be allowed to vary under certain circumstances  Sharing of risk ± Contract involve risk. is exposed to considerable risk.Functions of the Contract A contract should fulfil three functions:  Normal performance ± a contract should define what is expected from each party. The seller. especially.

Validity of the Contract For a contract to be valid:  There must be an intention to create a legal relationship ± tested by whether a reasonable man would consider that the parties intended to create legal relations  The contract must be legal ± it must conform to the legal requirements to enforce the contract  It must not be contrary to the public interest ± contracts of this type are binding excluding those clauses that contravene public policy  It may be written or verbal ± not easy to prove verbal contracts  It may be signed or sealed ± signatures under a seal permit damages to be claimed up to 12 years as opposed to 6 years  The parties must have the capacity to contract ± Corporations formed by Royal Charter have the full capacity to contract. A statutory corporation only has the power to contract for services for 14 which it was incorporated .

Common mistake ± where both parties are under the same misapprehension of offer and acceptance Operative mistake ± a mistake of fact ± prevents the formation of the contract 15 .Mistakes in the Contract Lord Denning defined mistakes in two forms:  Mistakes that render the contract void ± dealt with under common law  Mistakes that render the contract not void but voidable ± normally dealt with by court of equity.

Undue influence occurs where a party enters any kind of contract that prevents him or her from exercising a free and independent judgement. dishonour or false imprisonment to themselves or their family.Duress and Undue Influence Duress occurs in common law where a party enters a contract under violence or threatened violence. Presumed influence when one party relies on the confidential advice of the other. Economic duress could relate to one party not having any choice financially but to enter into a contract 16 .

and statements made which were not intended to be binding  Implied terms ± an implied term is binding to the same extent as an express term. These can be material statements made during negotiations and can be divided into.  Express terms are statements by which the parties intend to be bound. an implied term can imposed by statues such as the Sale of Goods Act and relevant EU directives 17 . statements made which were intended to be binding.Terms and Conditions The terms of the contract determine the extent of the involvement for the parties contracted. eg.

where legislative change makes the performance of the contract illegal. 18 . where an event which is fundamental to the contract does not occur  breach of contract ± if one party breaks a condition of the contract. the injured party may treat the contract as still running and claim damages for loss.Termination of Obligations Termination of obligations or discharge of contract takes place by:  performing the contract ± carry out the obligations will discharge the contract completely  expressing agreement which may involve either bilateral discharge or unilateral discharge ± effectively this is discharged by agreement  frustration of contract ± typically. the other party may treat the contract as discharged. where there is a total or partial destruction of some object necessary to the performance of the contract. where death or illness prevents a party from fulfilling the contract.

Liquidated damages are a sum fixed in advance by the parties to a contract in the event of a breach. only if it was in his or her reasonable contemplation. However. 19 . The defendant is liable. and the extent to which the defendant is liable for the consequence of the breach. Unliquidated damages are a sum fixed by the court. this is controlled by the remoteness of the damage.Damages Damages Damages are defined as a sum of money awarded by a court as compensation for a breach of contract. Their purpose is to put the plaintiff in a position he or she would have been in if the contract had been fulfilled.

Typical Contract Structure Typical clauses Definitions Sub-clauses Buyer Seller Documents making up the contract Contract works What the seller will supply Spares and Replacements Earliest/latest delivery Inspection and testing Marking Protection and packaging Qualifications Scope of supply Timings Delivery stipulation Beware inclusions/exclusions Delivery location Ownership of goods Installation Defines when responsibility passes Codes of practice Regulations Stipulations etc Responsibilities and procedures Maximum liability Period of liability Amounts/timings/methods Responsibilities for protecting confidential information/patents Ext to schedule/assignment sub-letting/dispute handling/termination and cancellation. bankruptcy/liquidation etc Changes Liability for defects Terms of payment Confidentiality Miscellaneous 20 .

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