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Contract law in ten minutes
The goal of this article is an ambitious one: to set out the basic
principles of English contract law in a way that can be read and understood
by a reasonably intelligent non-lawyer in one ten-minute reading.
Contract law is the foundation of English civil law. 'Civil' in this
context means that it regulates the obligations between individuals, rather than
between individuals and the state; these latter obligations are rather
the province of criminal and consitutional law. Contract law is one of
the first things taught to undergraduate law students, and usually takes up a
significant part of a year's study — and even that is normally regarded as
providing only an overview of the subject.
Naturally, a subject this vast cannot be dealt with in ten minutes.
Nevertheless, I feel that the basic, foundational principles
can be explained easily and fairly quickly.
Given the nature of the brief, I won't be citing any case law or entering
into detailed legal argument.
So here we go...
1. A contract is a specific kind of legal agreement between persons
A contract is an agreement between two or more persons to fulfil certain
obligations. The agreement has a particular legal form, which is
the subject of the next couple of sections.
The obligations may be to supply things, carry out tasks,
pay money, or almost anything else. I'm using the term 'person' here
rather than 'people' or 'individuals', because contracts can be
formed between companies or other corporate bodies, as well as
between private individuals. When a limited company enters into a contract,
it does so as if it were a private individual, and the contract is
with the company, not with its directors, even if it is the directors
who end up signing the cheques.
A contract is not by any means the only kind of legal agreement
that binds people to obligations.
There is another body of law relating to agreements called
runs alongside contract law, and overlaps with it in complicated
ways. For the most part, the law of covenants comes into play in transactions
involving land. A will is also a kind of agreement to
create obligations, albeit a
one-sided one. A will creates obligations, not on the testator (the person
making the will), but on the executors (the people who give effect to
the testator's instructions). What distinguishes these particular
agreements is not the nature of the obligations they create, but the legal
forms that are used to create them.
In what follows I will assume that the contract
is between only two persons whom I shall
Arnold and Betty. If an enforceable contract is created between Arnold and
has a right to go to court to ask for it to be enforced; that is,
if Arnold defaults on
his obligations, Betty can ask the court to compel Arnold
to fulfil his part of
the deal, or to pay compensation if he does not. And, of
course, Arnold can approach the court for the same sanction against Betty,
if she is in default.
For the sake of completeness I should point out that there is a technical
difference between a valid contract and an enforceable
contract, which we'll touch on later.
There is no formal, statutory definition of a contract, or of what
distinguishes a contract from any other formal legal agreement.
The basic principles of contracts are set out in case law,
which has been developed and refined over hundreds of years.
Over the years, the courts have decided that an agreement needs
to have certain
elements in place to be considered a contract. These elements are
the subject of the next section, and they are so well-established that
they are unlikely to change any time soon. However,
even if all these elements are in place, courts have often ruled contracts
invalid because they were made under duress, or on the basis of
incorrect information, even if provided in good faith.
Moreover, the courts have established the principle that some people
lack the legal
capacity to make contracts at all: as a minimum
one has to have sufficient intellectual competence to be deemed capable of
understanding the obligations of a contract. For most purposes,
(under 18) are not deemed competent to create contracts. The same applies to
adults with certain intellectual or psychological disorders, but experience
has shown that courts are very reluctant to set aside a contract
between adults on such a basis. Some agreement are prevented from being
upheld as contracts on the basis of the nature of their obligations.
For example, there
are restrictions on the enforcement of betting contracts.
On the other hand, in the interests of justice a court might
enforce an agreement that is not
a valid contract, without disturbing the principles that underly
If, for example, Arnold believed that he was acting under a contract with Betty,
and paid money to Betty as a result, but the agreement later turned out to
lack some element of contract formation, Arnold may
still be able to get his money back from Betty under the law of
is a very murky area of law indeed.
Similarly, there may be remedies available under the laws of tort
(essentially, wrongdoing), where an agreement does not amount to a full
contract. It can be argued that the modern law of negligence flowed from
one judge's willingness to compensate a victim of illness caused by
poor food hygiene, who
did not have an enforceable contract with the vendor of a bottle of
In summary, the law of contract has reasonably well-established principles,
but courts are often able to do the right thing despite those principles,
by appealing to other
areas of law. Over the last forty years or so, there has been a marked
intrusion of statute law into the principles of contract, which complicates
the situation still further.
2. A contract always requires certain elements
To have a valid, enforceable, contract,
five elements must always be in place. If any is absent, there is
no contract. As I mentioned before, that doesn't necessarily mean that the
agreement will not be upheld by a court, but the grounds on which the court
will do so are much less well-defined.
If any of these elements is missing, there is no contract. None. Nothing.
Nada. The jargon term for an agreement which looks a bit like a
contract but does not amount to
a contract at all is a void contract. It can be confusing, but it
is often important
to understand the difference between a void contract
and a 'voidable' contract, which retains some legal effect.
We'll come back to this later.
- Element 1. One party must offer something to the other party.
It doesn't matter
much what the 'something' is, so long as the terms of the offer are clear.
For example, if Arnold says to Betty "You can have my bicycle for £50'',
that is an offer. If I take a newspaper to the checkout in a
newsagent's shop, I am making an offer to purchase it for the cover
price. However, if I advertise my car for sale in a local newspaper,
that is not an offer. Nor is it an offer if I display goods in
a shop window for sale. This may seem strange, as these things seem
like offers. The reason they are not offers is that the contract, if
there is one, comes into
existence the moment the offer is accepted, and becomes binding from that
moment onwards. If an advertisement to sell a car is an offer, then
everyone who telephones to say he or she wants to buy it potentially
has a contract with me; and I will be in breach of all but one of these
as I only have one car to sell. So the courts do not treat advertisements,
or displays of goods, as offers. Similarly, it is probably not
an offer in the strict sense if Arnold says to Betty "Would you be interested
in buying my bicycle for £50 or thereabouts?'' The terms are
simply not sufficiently certain.
- Element 2. The other party must formally accept the offer.
The acceptance must be
unequivocal, and not in the form of a negotiation. If Betty responds to
Arnold's offer to sell at £50 by saying "Will you take £40?''
that is an entirely new offer, which Arnold can accept or reject as
he sees fit. There is a huge body of case law concerning how, when, and
why offer and acceptance take place.
- Element 3. There must be a consensus, a 'meeting of minds'.
This means that
that Arnold and Betty must each understand what the other is bringing
to the deal. When
people try to wriggle out of their contractual obligations, it is
this requirement that is most frequently cited as the reason why
they should be allowed to. More on this point later.
- Element 4. There must be consideration. What this means, in short,
is that Arnold and Betty must both bring something to the deal. If Arnold offers
to give Betty his bicycle, free of charge, then that is not
a contract. Betty cannot go to
court to enforce the contract — it simply doesn't
exist. Consideration can be a tricky matter, and we'll come back to
it in the next section.
- Element 5. Arnold and Betty must intend to create a contract. Certain agreements are
assumed not to be intended to create contracts. The most obvious
example is family arrangements: agreements between husband and wife, or
between parent and child, are assumed not to be contracts. Of course,
this is only a presumption, and it can be rebutted if suitable evidence
is brought forward.
3. In English law, any valid contract requires consideration
Traditionally, is a very strong principle of English law that
for a contract to be
valid, there must
be valid consideration. That is, the person who accepts an offer
made to him or her must offer something of value in return. An agreement to
make an outright gift is never a valid, binding contract. It might be a valid
term in a will, or in a covenant if certain formalities are met,
but it is not a contract. Consideration
is a peculiarly English concept, and only features in the legal
systems of jurisdictions that have some connection with English law
— the USA, for
example. It is an alien concept in most European states. Recently, a
number of significant court cases have somewhat reduced the scope of
the doctrine of consideration, because in some cases it leads to
In English contract law, it does not matter whether the value of the
consideration accurately matches the value of the thing being offered. The
contract will only fail if nothing of any value at all is offered. For example
confectionery wrappers have been held to be valid consideration, even though
their monetary value is negligible.
This all seems simple enough, but the Devil, as always, is in the details. The
problem turns on what 'value' means. The situation is clear enough when the
consideration is money or a tangible object,
however meagre its value. Problems arise
when the consideration is an action.
The performance of a
professional service is usually taken as valid consideration, as it has
a measurable monetary value. An agreement to enter into contract 2
is usually seen as valid consideration for a contract 1. A
textbook example of a problem area is an agreement to remit a debt. If Arnold owes Betty
£1000, but cannot pay, Betty — needing the money — might say, "Well, if you
can pay £800, I'll let you off the rest''. If Arnold then pays up the £800, is the original debt discharged? The answer would appear to be 'no'.
Betty could still, at some later date, pursue Arnold for the
outstanding £200. How
can this be? Betty made an offer to remit the debt — reluctantly, of course,
but of her own free will — and that offer was accepted. Why do Arnold
and Betty not
have a valid agreement to call the debt cancelled? The answer seems to be that
Arnold's consideration — the payment of £800 — has no legal value.
It clearly has monetary value, but it is not good consideration. The reasoning
is that the £800 was due to Betty anyway, so Betty did not give Arnold
of additional value.
There are a number of other grey areas in the adequacy of consideration,
but so long as both parties offer money, or something to which a monetary
value, however small, can be attached, there's usually no problem.
I'll point out that in some areas of English law, a promise to marry
is considered to be good consideration, despite its having no obvious
monetary value. However, the class of contracts that are amenable to
marriage consideration is a rapidly-diminishing one, and I only mention it
for historical interest.
4. Contracts need not always be made in writing
Most contracts involving significant amounts of money or time are
made in writing, for reasons which should be obvious. However, there
are very few circumstances in which English law requires
that a contract be in writing. Of these circumstances, the only one
that most people will ever encounter is a contract involving
an interest in land. An interest in land may include freehold
ownership of the
land itself, of course, but it also includes mortgages, long leases,
and technical matters such as contracts to grant easements (e.g.,
rights of access).
Even for interests in land, it remains uncertain whether the contract
must actually be made, from the outset, in writing. The exact wording of
the relevant statute is "manifested and proved by some writing''.
That this wording was never intended to mean that the contract must be
made from the outset in writing is clear, because later in the same section of
the statute it uses the term "made in writing'' of some other transaction.
Quite what "manifested and proved''
was intended to mean is not entirely clear, and that confusion
has lined the pockets of lawyers for nearly a hundred years.
In short, apart from certain land transactions — which must be backed
up by written evidence of the agreement — and a few other obscure
transactions (a contract to create a trust, for example) an oral contract
is binding under English law. Does this mean that you can enforce a
promise that was made to you in the pub last night? In principle, yes,
if the elements of a valid contract are in place. In practice, no — you probably won't be able to gather sufficient evidence to
support your case.
An interesting situation is one in which a contract is made in writing,
but in court the parties refer to verbal agreements that they made
during the negotiation stage. The fact that there is a written contract
neither party can deny that some agreement was made; but it
can be awkward to determine its exact scope. Consequently, it is
conventional to include a term in a complex contract to the effect that
the written document constitutes the whole of the agreement.
5. A contract may contain multiple terms, which may not have equal weight
A contract may, and very often does, set out multiple obligations binding on
the parties. Any contractual statement is referred to as a 'term' of
the contract. It is very likely that the parties do not intend all these
terms to be equally binding or, at least, have equivalent consequences
Lawyers divide contractual
terms into 'warranties' and 'conditions'. There might be a
third type, the 'inominate term' ('term without a name'), but we
won't worry about that here. The distinction between a warranty and
a condition becomes a vital one if the contract is not fulfilled properly.
If a contractual term is considered to be a warranty, then the
contract as a whole will survive that term's obligation being broken.
The person who breaks the obligation may be ordered by the court to
pay compensation for his breach, but the contract as a whole continues
to bind the parties. On the other hand, if a term is considered to be
a condition, then a breach of that condition is a breach of
the whole contract, which then ceases to be binding on either
Here is an example.
Betty agrees to buy Arnold's car for £1000. Arnold
agrees that he will clean
the car before delivering it to Betty. There are three obligations here — Arnold has an obligation to hand over the car, and an obligation
to clean it. Betty has an
obligation to pay money to Arnold. The obligation to pay, and the obligation to
hand over the car, are probably conditions. If either is not fulfilled,
the contract is dead in the water. However, the agreement
by Arnold that he will clean
the car is probably a warranty, not a condition. What this means is that
if Betty does
not pay the money, not only does Arnold not have to hand over the car, but
he doesn't have to clean it either. The contract ceases to bind anyone
to anything. On the other hand, if Betty hands over the money, and then
finds that Arnold has not cleaned the car, she probably cannot treat the whole
as broken and force Arnold to repay the money. What
Betty can do is to
pay to have the car cleaned herself, then ask the court to force Arnold to
reimburse her the cost. But Betty can't get back the money she paid
for the car, because A's
breach is not of a condition, merely of a warranty.
Because of the crucial distinction between a warranty and a condition,
it would be nice if there were a magic formula for deciding whether a particular
obligation were a warranty or a condition. But, on the whole, there isn't.
The courts have developed rules-of-thumb over the years, of which two are
First, an obligation that 'goes to the heart of
the contract' is probably a condition. If the obligation is central to
the whole purpose of the contract, then breach of that obligation will
bring the contractual obligations to an end.
The second important rule of thumb is
that the courts will give due weight to the intention of the parties.
This is why you will often see wording like this in commercial contracts:
"It shall be a condition of this contract that...''. The wording expressly
sets out that the obligation in question is a condition. However, the courts
have refused in the past to honour such an agreement where it is plainly
6. Once made, the contract must (usually) be performed
Failure to perform one's contractual obligations is known as
breach of contract. It is very common for a person who is
alleged to be in breach to claim that the contract has become much
harder to perform, or more expensive, than when the contract was
agreed. Traditionally, such arguments have made little headway in the
courts, which have held parties to their agreements to the extent
of bankruptcy. More recently, this stance has softened a little, but
the general principle remains: don't enter into a contract unless you're
sure you can perform your part of it.
A contract that is impossible (merely than difficult or expensive)
to perform, for reasons outside the parties' control, is said to be
frustrated. In such cases the courts often will release parties
from their obligations. Very often one party will already have expended
time and money, before the contract is set aside. In such cases the
courts have the discretion to order reasonable compensation to be paid.
It is recognized, however, that there is generally a loser when a contract
Because of the danger of frustration, many commercial contracts contain
terms setting out in advance what the parties' liabilities will
be in such an event.
7. Even an invalid contract might have legal consequences
The general principle in English law is that a contract is considered to
be good right up until the moment it isn't. Even if a contract is
determined by the courts to be invalid or unenforceable, that doesn't
necessarily mean that it is as if it never existed. Earlier I mentioned
the concept of the 'void contract' — a contract with no legal effect
whatever. In practice, when contracts are set aside by the courts, they
are more often deemed to be 'voidable', rather than 'void'. This
distinction is subtle, but potentially very significant, especially
for lawyers, who often live well on fighting one another over the
A voidable contract is one that starts off valid, but can be set aside
later by the parties. For example, if Arnold persuades Betty to
buy his bicycle on
the basis that it has a carbon-fibre frame, but it later turns out
that the frame is made of cast iron drainpipes, then there is,
initially, a valid contract. That remains true
even if Arnold knew perfectly well he was selling something other than
the thing he purported to offer.
Why? Because all the basic elements of contract formation were in place:
offer, acceptance, consideration, consensus, and intention.
Of course, Arnold has committed a fraud on Betty, and when Betty discovers this
she can have the
contract set aside.
Until she does, however, Arnold and Betty have a contract. In short, this contract is
voidable, not void.
This may sound like academic nit-picking, but it's not. This point — the
difference between a void contract and a voidable contract — is a frequent
area of litigation. You see, if Betty buys goods under a voidable contract — perhaps because of fraud, or because the seller carelessly misrepresented
the quality of the goods — then she becomes the legal owner of those goods.
She becomes the owner of the bicycle, not when she pays Arnold,
but at the moment the
contract is formed. If Betty later sells the bicycle to Charles, then Charles
legal owner of the bicycle from that moment. Betty can sell
what she legally owns, even if she came
to ownership of it by means of a contract which isn't binding on her.
Now, consider the
case where Arnold and Betty have a void (nonexistent) contract. Perhaps
Arnold offered to sell the bicycle, but the price was never clear.
Because there is
now no contract, Betty never becomes the owner of the bicycle, even if she
pays for it. This is so important, it's worth saying again: the title to
goods is not exchanged under a void contract. If Betty later sells the bicycle to Charles,
Charles never becomes the legal owner. Betty simply doesn't have anything
to sell even if, at the time, she believes she does.
So, while it might not matter much to Arnold or Betty whether their contract is
deemed to be voidable or void, to Charles it makes all the difference in the
If the contract is voidable, Charles gets to keep
the bicycle he has purchased from Betty, but if it is void he can lose it
completely, most likely along with his money.
As you can imagine, a huge amount of lawyers' time has been spent
over the years in efforts to prove that a contract is void, not voidable,
or vice versa. Courts are reluctant to hold a contract as void if
elements are in place, because doing
this disturbs the rights of innocent third parties. However,
a contract will usually
be ruled void if it pursues an illegal objective (a contract to assassinate
someone, for example, is invariably void), or was made by a person
of unsound mind, or
was made a result of a mistake by both parties. For example, if
I offer to sell you my green car, meaning the green Robin Reliant, and
you offer to buy my green car, meaning the green Rolls Royce, most likely
we don't have any kind of contract. The kind of mistake can be interpreted as
an absence of 'meeting of minds', so it's a moot point whether we have a
contract that is void for mistake, or void for lack of consensus —
practically it doesn't
make much difference.
8. The victim of a breach of contract is entitled to certain remedies
If Arnold is in breach of his contractual obligations to Betty, she
may ask the court for certain remedies. Recission is the
setting aside of the contract, as if it never existed. Money and
goods transferred must be returned. Damages is financial
compensation for losses incurred. Specific performance is
an order to fulfil the contract, or else face being held in contempt of
court (a Bad Thing).
More than one of these remedies can be sought, and awarded,
for the same breach. Where damages are awarded, the general principle is
that the party in breach must pay compensation not only for direct
losses, but for all reasonably forseeable losses. Moreover,
the party in breach will normally have to pay the other side's legal
expenses; these days such expenses often amount to more than the amount
The victim of a breach of contract is expected to take reasonable steps
to control his losses, rather than simply letting everything go pear-shaped
and expecting the party in breach to make good all the damage. If
Arnold buys a regulator for his nuclear reactor from Betty and, on
delivery, it turns out to be the wrong type, he can't let the reactor
explode and then expect Betty to make good the damage. The law expects
Arnold to do the right thing as well; in this case that might mean
buying a replacement from another supplier and asking Betty to return
his money (and reasonable costs, perhaps).
It is increasingly common for contracts to contain agreements about
the scale of damages that will be paid for breaches by either party.
In principle, this simplifies matters for the courts which, as we
have seen, generally try to uphold the parties' agreements. However,
there is a tendency for such clauses to become punitive. If a contract
for the rental of a piece of equipment contains a term that the hirer
must compensate the owner a million pounds for every day that the item
is late being returned, such a term is likely to be deemed a
penalty clause and struck out. However, depending on the nature
of the equipment, a term enforcing compensation of, say, £100 per
day might be considered liquidated damages — a genuine reflection
of the loss that the owner might suffer — and be held enforceable.
9. Remedies for breaches of contract do not (usually) depend on motive
For the most part, the court is not concerned about how blameworthy
either party is, when deciding how to award remedies. Blame, guilt,
are really concepts applicable to criminal, rather than civil,
law. In contract cases, what matters is simply responsibility — who is responsible for the breach of contract?
The example of innocent misrepresentation — which is interesting
in its own right — might help to clarify this concept.
If Arnold induces Betty to enter into a contract with him
by means of false information — turning back the mileometer on a car he is selling, for example — then Arnold has perpetrated a fraudulent misrepresentation. If he
claims in good faith a certain mileage, because of incorrect information
given to him by the previous owner,
then he has committed an innocent misrepresentation. It might be felt
that a fraudulent misrepresentation is a worse failing — more blameworthy — than an
innocent one, and until relatively recently the English legal system
took the view that it was. If Betty is the victim of a fraud,
then not only is she
entitled to set aside the contract (and reclaim any money paid), but
she is entitled to be compensated for any losses following directly from
the contract, even
if they were not reasonably foreseeable by Arnold. In some cases,
these consequential losses can be very significant — many times more
than the value of the contract.
However, since the Misrepresentation Act (1967) came into force,
the victim of an innocent misrepresentation is entitled to the same
remedies as the victim of a fraudulent misrepresentation. The only
defence that Arnold has in this case is that he had good reason to believe
that he had been given correct information about the mileage, and that he did
believe it was correct it right up
until the contract was formed. If he could have checked the details, but
did not, such a defence is unlikely to be accepted by the court.
On the face of it this does seem a little harsh — people make mistakes,
after all. However, civil law — as opposed to criminal law — is
not really concerned with motive, but with responsibility. In the
mileometer example, Arnold is not (perhaps) ethically reprehensible for
not checking the mileage on the car he is selling, but he is
certainly accountable for it. As an aside, I will point out that if he
did deliberately misrepresent the car's mileage then he might be guilty
of a criminal offence as well; but that is completely separate from his
obligations under contract law.
The practical implication is this: you need to
be very sure indeed of the accuracy of all the information you use
to negotiate a contract.
10. Some contracts have implied (unstated) terms
Courts will very often rule extra terms into a contract, beyond what the
parties expressly agreed to. A common-sense reason for this is that some things
are held to be so obvious that they never get written down. For
example, if Arnold is selling goods to Betty, it would be unreasonable for him
to claim later than he never promised Betty that the goods were actually his
to sell. It is an implied term of all contracts for the sale of goods
that the seller
actually owns the goods being sold. Similarly, it is an implied term of such
contracts that if a buyer is shown a sample of the goods, the sample
is representative of the rest. These implied terms, along with many others,
are now set out in the Sale of Goods Act (1979).
Some implied terms are matters of public policy. For example, it is
a term of all contracts of employment that that the employer and
employee will act with 'mutual trust and respect'. Many actions for
wrongful dismissal cite a breach of this implied term, which in most
cases neither the employer nor the employee expressly agrees to.
Many contracts are formed with only implied terms. If I buy
goods in person from a shop, for example, then most likely there will be
no specific agreement. In such a case, the contract will be governed
only by the implied terms relating to sale of goods. Similarly, if I
enter into casual employment for a short period of time, I may never
have a contract of employment. Again, the employee and employer are
bound by general contractual terms established in employment law.
Many implied terms can be overridden by an express provision of the
contract. For example, if goods are purchased by mail-order (or email-order,
these days) it is implied that the risk of loss of those goods is
borne by the purchaser. It is very common for contracts to reverse
this implication, because the purchaser usually has no business
arrangement with the postal service. However, not all implied terms can
be overridden by the parties. It remains uncertain, for example,
to what extent an employee can be bound by a contract that compels him to
work dangerously long hours, even if he signs a contract that
expressly stipulate that he must.
In summary, when you enter into a contract, you may be bound by
terms that apply not just to the specific contract, but to all
contracts of that type.
11. Many types of contract, are regulated by
special provisions relating to that type
English courts are, on the whole, keen to enforce all particulars of
a contract made by consenting parties of sound mind. No contractual
term is ever glibly set aside. However, it is recognized that we can't
enforce every kind of agreement between every kind of person in every
kind of circumstance.
One common ground for ruling out contractual terms is on the basis
of unfairness. Contracts are often formed between people of
highly unequal bargaining power — consumers and big businesses, for example,
or employers and employees. In such case the 'weaker' partner might well
be compelled to agree to unreasonable terms, having little alternative.
There is now strong legislation to regulate and strike out unfair terms,
especially when used by businesses against consumers. The law relating
to consumer contracts is an unwieldy and expanding body of material
in its own right.
Related to unfairness is the idea of exclusion clauses. A contract will
often try to exclude liability of one party for adverse effects following
from the performance of the contract. It is no longer permissible, for example,
for a contract to attempt to exclude liability for death or personal
injury. Some lesser consequences can be excluded but, again, there are
relatively strict tests of fairness. In general, the courts have fewer
powers, and less willingness, to intervene in contracts between businesses, than
in those between individuals and corporations.
Many classes of contract have specific restrictions, and often these
types of contract relate to matters that are of profound importance to
most people: employment, property, and financial services (especially credit).
These three areas
in particular are associated with such a volume of statutory regulation
that it would be dangerous to assume that a grasp of conventional
contract law would be sufficient to interpret the parties' obligations.
For example, recent changes to property law have enhanced the
consideration requirements for land transactions. It is no longer possible
to offer one pound as consideration for the purchase of a house,
although it would have been possible (in principle) until recently, and
even one pound would be valid consideration for almost any other type
12. Contracts can (sometimes) create rights, but not
obligations, for third parties
This is a relatively recent development in English law. Formerly, contracts
were held to create no legal rights for anybody but the offerer and offeree.
For example, if
Arnold buys a toaster from Betty, and gives it as a present to Charles,
considerations of natural justice would suggest that Charles is entitled to
some response from Betty if the toaster turns out to be unsatisfactory. If
the toaster actually explodes and singes his eyebrows, Charles may have
remedies against Betty under the law of negligence; but if his loss is
purely financial, this is considered to be a matter for contract law.
Charles doesn't have a contract with anybody.
scenario is often referred to as the 'wedding present problem' in law
textbooks, for reasons that should be obvious. Arnold still has legal
remedies against Betty as the original purchaser but, in practice,
it can be difficult for Charles to persuade Arnold to enforce
Recent changes in the law mean that now third parties like
Charles can take action, in limited circumstances, under contracts
to which they are not parties. For this to be permissible, it has to
be very clear in the contract that the contract is intended to benefit
a third party.
In practice this means that the 'wedding present problem' remains a
problem, as most contracts made in shops are not negotiable like this.
Although a contract may create rights for third parties, it cannot
create obligations binding on anybody but the original parties.
There is, of course, much more to be said about this vast and fascinating
subject. In fact, contract law is becoming increasingly extensive and
modern technological developments stretch the applicability of existing
law. For example, it is a matter of contention to what extent the
existing law on contracts formed at auction applies to on-line
auctions such as eBay. It remains somewhat uncertain whether purchasers
can be held to general terms of sale that are visible only suppliers'
web sites. However, we can expect all changes to the law of contract
to be incremental, and broadly within the scope of the basic principles outlined