Contract Law: Formation, Terms, Breach and Remedies
This domain tests whether a binding contract exists, what its terms are, and what a court will award when one party fails to perform. Insurance questions lean on these rules whenever cover is disputed, a proposal form is misstated, or a clause excludes liability.
Formation
- Offer versus invitation to treat: advertisements, shop displays and auction calls are generally invitations to treat.
- Acceptance must be unqualified. The postal rule applies to letters; instantaneous communications are effective on receipt.
- Consideration must be sufficient but need not be adequate; past consideration is no consideration.
- Intention to create legal relations is presumed in commercial dealings; capacity and certainty must also be present.
Terms
- A statement is a term rather than a mere representation where it was intended to be relied on, made close to contracting, or reduced to writing.
- Conditions are major terms, warranties minor, innominate terms are classified by the consequences of breach.
- Terms may be implied by statute, custom, course of dealing or business efficacy.
- Exclusion clauses must be incorporated (signature, notice, course of dealing), construed strictly, and survive statutory control: UCTA 1977 reasonableness for business liability; CRA 2015 fairness and transparency for consumers, with no exclusion of liability for death or personal injury.
Misrepresentation
A false statement of fact that induces the contract. It may be fraudulent, negligent (Misrepresentation Act 1967 s.2(1) - the representor must prove reasonable grounds) or innocent. Remedies are rescission and/or damages; rescission is barred by affirmation, lapse of time or third-party rights.
Breach and remedies
Damages are usually the expectation measure, limited by remoteness (Hadley v Baxendale) and mitigation. Equitable remedies include specific performance, injunction, rescission and rectification. Liquidated damages clauses are enforceable; penalties are not. The Contracts (Rights of Third Parties) Act 1999 allows a named third party to enforce a term.
Worked example
A broker promises a delivery date of 1 May; the goods arrive 20 May and the buyer loses a £50,000 resale contract of which the broker knew nothing. The £50,000 is not recoverable: it falls outside the first limb of Hadley (arising naturally) and the broker had no actual knowledge under the second limb. Only losses within the parties' reasonable contemplation at formation - typically the ordinary difference in value - are recoverable.
Traps that cost marks
- Treating every pre-contract statement as a term.
- Assuming rescission is always available once misrepresentation is proved.
- Forgetting that UCTA applies to business liability only, and that neither UCTA nor the CRA permits exclusion of death or personal injury.
- Confusing liquidated damages with penalties.