AN INTRODUCTION TO CONTRACT LAW
AN INTRODUCTION TO CONTRACT LAW
Report by Karen Harper (Trainee Company Secretary)
Introduction
I have recently joined the company as a Trainee Secretary and as part of my induction I have been set a task to demonstrate my understanding of Contract Law. The Company Secretary has requested that I cover three areas:
. Discuss on what basis a contract is deemed to be valid.
2. Select at least three terms that could appear in a contract with an artiste and explain the significance to the company.
3. Assess the validity of two clauses included in an artistes contract.
This report has been presented in an informal format as it is hoped that it may prove useful at a later date to provide an insight into Contract law for those who are unfamiliar with this area. This idea was conceived whilst conducting research for this project, as most of writings on Contract Law are to say the least, a little heavy going with legal jargon and complex terms. Such text only disguises the true meaning of this area of Law and makes it even less comprehensible to those who have not studied or used it on a frequent basis.
I am to cover each of the areas individually by explaining they're meaning, and then giving a basic overview of each.
Discuss On What Basis A Contract Is Deemed To Be Valid
The Oxford Dictionary of law describes at Contract as " A legally binding agreement. Agreement arises as a result of offer and acceptance, but a number of other requirements must be satisfied for an agreement to be legally binding." Before we discuss what makes a contract valid let us first explore what a contract is and what it must contain.
A business will enter into contracts with all or any of the following, Lenders, Employees, Sellers of land or buildings, Suppliers of equipment, Suppliers of stock and / or Customers. A contract can be as simple as you walking into a shop and requesting to buy a bag of apples from the owner. This is a simple, informal contract, however within the world of business contracts can be a complex area and a great deal of attention must be taken when formulating a contract to ensure that all necessary areas have been covered. Not only the entering into and working of a contract but also we must consider the inevitability of a contract coming to an end or being legally binding from the outset. A contract can be deemed to be invalid (or void) if a mistake has been made and requirements have not been met. When a contract is declared invalid all parties involved must return (if possible) what has been exchanged as a result of the contract. As our organisation operates within the entertainment business such an exchange can often be complicated so it is vital that all the essential terms are considered and clarified when initially formulating a contract.
The essential terms of a contract, which must be covered to ensure its validity, are:
* There must be an offer or agreement. This is " An indication of willingness to do or refrain from doing something that is capable of being converted by acceptance into a legally binding contract"(Oxford 1997). However, it must be clear in its intentions- an Invitation to treat is a generalised offer to many, such as a display in a shop window or a Declaration of intent which exists to invite offers in the future, such as a an auction. The offer must not be too vague. It must be clear what is being bought or sold, and at what price - otherwise the offer is automatically invalid. In the case of Scammel v. Ouston 1941 the parties agreed that Ouston should acquire from Scammel a new motor-van "on hire-purchase terms." The House of Lords held that the agreement was too vague to be enforced, since Hire purchase terms were many and various, and it was impossible to decide on which hire-purchase terms the parties intended to contract.
* There must be an acceptance. This is when all the terms and conditions of an offer have been agreed, and accepted by the party or parties entering into the contract with the initiator. It is essential at this point that all parties are aware of the terms and conditions they are entering into. Recently many entertainers have sought to void their contracts as they claim they signed when less famous and where unfamiliar with legal matters so thus unaware at the time of the long-term implications of entering into such agreements. They have argued that they did not know what they were signing at the time or read the small print. For this reason it is essential top the success and longevity of our business that we, and any parties we are involved with are completely aware of the terms of any contract. Case Law has established the following rules of acceptance:
o Acceptance can only be made by the person to whom the offer is made.
o Acceptance must be absolute and unqualified. -The offeree cannot add extra terms and conditions. Doing so will be a counter offer and so it would be in the best interest of the offeror to make a new offer.
o Acceptance has to be communicated to the offeror. This will normally be through word of mouth or in writing but the contract is deemed to be formed at the time the offeror receives the acceptance. In the case of a posted ...
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o Acceptance can only be made by the person to whom the offer is made.
o Acceptance must be absolute and unqualified. -The offeree cannot add extra terms and conditions. Doing so will be a counter offer and so it would be in the best interest of the offeror to make a new offer.
o Acceptance has to be communicated to the offeror. This will normally be through word of mouth or in writing but the contract is deemed to be formed at the time the offeror receives the acceptance. In the case of a posted acceptance that is lost the time of postage is seen as the formation of contract.
o Acceptance must be made in the way set out in the offer. If the advertisement states order in writing then so it must be.
In Eliason v. Henshaw (1819) Eliason agreed to buy flour from Henshaw and pay the Waggoner for the flour. However, the acceptance was sent by post and arrived after the Waggoner had returned. The court held that there was no contract because the mode set out in the offer had not been employed. However, more recent courts have ruled that a different mode of acceptance can be considered to form a contract if it does not disadvantage the offeror. This is particularly important for modern business transacted over the Internet.
* There must be consideration. This is what is to be given as a result of entering into a contract i.e. goods, money or services. As we are an entertainment business the consideration is often the skills of our clients i.e. their singing, musical ability or performing techniques. As "skills and talents" are not exactly material we must therefore pay great attention when formulating contracts, especially when there is a failure to supply adequately.
A classic definition of Consideration, in terms of benefit and detriment, where given by J Lush in Currie v. Misa (1875) when he said " A valuable consideration may consist either in some right, interest profit or benefit accruing to one party, or some for bearancer, detriment loss or responsibility given, suffered or undertaken by the other."
* There must be intention to create legal relations. A shop displaying goods for sale is stating its intention to enter into a contract with customers, thus creating legal relations. However, consider the case of Fisher v. Bell (1961). It was decided that a shopkeeper who displayed flicknives in his shop window had not broken the legislation forbidding the sale of such goods since the display amounted to an invitation to potential buyers to make an offer, which he could refuse or accept. I regularly give my children pocket money but this is not an intention to create legal relations. However, I agree to pay my window cleaner £3 each time he cleans my windows is.
Once an offerer makes an offer, an agreement is reached and the offeree accepts then it can be said that an agreement has been made and we have the firm basis for a contract. Much of Contract Law is based on past case law whereby the making of an offer has been deemed to be both a proposal and a promise to comply with the terms. The most notorious example of the concept of a legally valid contract was displayed in the case of Carlill v. Carbolic Smoke Ball Co. (1893). The Carbolic Smoke Ball Company advertised that they would pay £100 to anyone who caught flu after using one of their smoke balls in the way they instructed. They placed £1000 in a Bank account should it be required. Mrs Carlill bought, and used, a smoke ball in the way instructed but still contracted flu. She tried to claim her £100 but failed and thus sued Carbolic Smoke Ball Co. The judge presiding over the case stated that Carbolic had entered onto an agreement and made an offer to the whole world of £100 to anyone who contracted flu after using his or her smoke ball in the instructed way. The intention had come in the form of the advertisement. Mrs Carlill recovered her £100 and the judge stated that "if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and, if he has made them, the extravagance of the promise is no reason in law why he should not be bound by them." Therefore we must be clear in what we offer, to whom we offer it and what implications are likely should we fail to do so.
Having highlighted the most important terms of a contract the following points should also be considered.
* The correct format. Contracts can be either written or verbal. Verbal contracts are less easy to prove however are ultimately as legally binding as written contracts. Verbal contracts are often made between two parties who know or trust each other, are easily entered into and hard to prove. Therefore to eliminate any ambiguity or misinterpretation any contract entered into within business should be done so in a written format.
* The capacity to contract. The parties entering into a contract must be legally capable of making an agreement, i.e. they should not be too young, too old or too ill. A minor is capable of making valid contracts for necessaries and is also bound by any beneficial contract of service he enters into i.e. contract of employment, or training. This area is covered in more detail in the Minor Contracts Act 1987, it is my suggestion that to avoid entering into too greater detail that this be covered as a separate issue in another report I intent to produce at a later stage in my career with this business. As I stated in the introduction the aim of this report is to give an overview of Contract Law without becoming too complex. A contract that is made by a person who is drunk or mentally ill is void able if the original party knows that his state will prevent him fulfilling the contract.
* The reality of Consent. Consent by all parties is essential to the validity of a contract. It must be given freely, without duress and with sufficient mental capacity.
So, on what basis a contract is deemed to be valid. The idea of a void contract is a contradiction because if it is void then it is not a contract. A contract is invalid if mistake has been made and the terms discussed above have not been met. When a contract is declared void the parties must return what they have gained form it. A void able contract is one that can be made so because there has been misrepresentation or made with someone who does not have the capacity to enter into such an agreement. A contract can also be unenforceable is it is valid but one of the parties involved refuses to carry out the terms of the contract. This is an area, which our business must pay particular attention to when drawing up new contracts as a mistake in the initial stages could prove to be costly later on.
Select At Least Three Terms That Could Appear In A Contract With An Artiste And Explain The Significance To The Company.
As we have seen there are certain terms that it is essential to include when formulating a contract. However, due to the nature of our business we must also be aware of specialist terms of contract, which it is advisable to include when preparing contracts for artistes. After conducting research into this area I deem it advisable that our business raises to all its employees an awareness of the following terms:
* Exclusion Clauses. This is "A term in a contract purporting to exclude or restrict the liability of one of the parties in specified circumstances"(Oxford 1997). They perform a number of useful functions:
o Help to allocate the risk under contract. Consider this example -John, who lives in Colchester, wishes to have his furniture transported to his new house in Preston and he contracts with peter to do this. Peter, who is self-employed, offers a price, which is substantially lower than any other firm because he offers no insurance cover for goods whilst in transit; he relies on the owner of the goods either to use their existing policy or to take out their own special policy. In order to give effect to his pricing policy Peter inserts a clause into his contracts to the following: " no liability is accepted for any damage, howsoever caused, to any goods during the course of transit." Therefore the risk of damage to goods is clearly allocated to John thus negating the need for Peter to take out insurance.
o Help to reduce litigation costs. This is done by making clear the division of responsibility between the parties- they both know where they stand.
o Enable the mass production or standardisation of contracts. People such as Peter will be able to use a standard contract thus reducing the need for negotiations and extra cost incurred by producing individual contracts for each task.
The courts see such clauses as restrictive and harmful to weaker parties whose actions are often oppressed by such clauses. Therefore, through case law and with the assistance of parliament the courts have sought to limit the use of such clauses. Parliamnet has used statute to change common law so that only two types of exemption clause exist:
Limitation Clauses-Where a part limits liability in contract i.e. any damage to customers' property will be limited to the replacement value or £15, whichever is the lower.
Exclusion Clauses-Where a party tries to avoid any liability at all i.e. the management will take no responsibility whatsoever for damage to clients' property, however caused.
The courts will consider three steps to establish the validity of an exemption clause:
INCORPORATION Is the term part of the contract?
CONSTRUCTION Can the damage, which has occurred, be interpreted as falling within the boundaries of the exemption clause?
LEGISLATION Is the term allowed within current statute law?
Exemption Clauses are essential to our business and should be considered when drawing up contracts with parties who own venues where an artiste of ours is to perform. Consideration should be made to factors which may cause a concert to be postponed or cancelled due to circumstances beyond our control but enforced by the owners of the venue i.e. closure due to maintenance or change of ownership at time of due date of performance.
* Force Majeure.This is a vital area of consideration for our business as it takes into consideration everything, which can prevent a performance happening that is beyond our control. This phrase is used in commercial contracts to describe events possibily affecting carrying out of contractual obligations due to acts of God, fires, failure of suppliers, strikes or labour dispute. Such events are beyond the control of parties entering into a contract but can have implicated their ability to conduct contractual responsibilities. Open-air concerts may have to be cancelled due to adverse weather conditions but what alternatives are to be offered if the performer has a schedule of concerts to continue?
* Liquidated damages. Within the world of entertainment there is a great amount of competition mixed with an ever-changing market demand. In modern times performers have been seen to remain in the limelight only for a short time. On the other hand major performers or stars are often reported in the media to have made almost unachievable demands in return for exclusive ownership of their talents. For these reasons when our business enters into a contract with a new performer we must foresee the possibility of the contract breaking down and thus establish what damages are to be paid should the need occur. Liquidated damages are decided at the time of making a contract and are genuine pre-estimate as to the amount of loss should breach occur. Careful consideration should be made as to the performers potential as loss can only be that which was stipulated not actual. So if the loss suffered is greater than the sum stipulated, the innocent party cannot ignore the clause and sue for actual loss (Diestal v. Stevenson 1906). If a performer aspires to become a mega star but then decides to establish a contract with a new business or agent he is then in Breach of contract with the initial agent. Therefore damages have been incurred and must be paid. In more recent times Sony record have "poached" stars from agents and as part of the new contract have offered to pay any damages to the old company. Therefore the incentive to remain loyal is not always strongest, we must be aware of this scenario as we operate in a wide industry.
Assess The Validity Of Two Clauses Included In An Artistes Contract
A)"Should it become necessary to employ a substitute performer, this will
Constitute a breach and the contract will therefore be rescinded."
B) "The artiste is required to attend rehearsals at the venue for six days prior to the performance. Failure to attend rehearsals will constitute a breach and the contract will therefore be rescinded."
I have been asked to asses whether these two clauses are valid. If they are not fulfilled would they be a breach of warranty or a breach of condition and to justify the assessment with case law or legislation.
Taking it on face value clause A is in my opinion not valid as it is a clear example of Frustration. Frustration arises when some event occurs, during the lifetime of a contract, at the fault of neither party, which makes the contract impossible, illegal or radically from that originally undertaken. It occurs when something occurs outside the control of the parties, which means that one party is unable to fulfil obligations under the contract, and is then claimed as an alternative to a claim of breach. At one time the terms in a contract were viewed as absolute, so a party was totally responsible to perform or be held in breach. More recently courts have become to be less harsh in the view of contractual obligations considering the reality of transactions. A leading case in this area was that of Taylor v. Caldwell (1863). A music hall and gardens were hired for a concert; the hall caught fire and burnt down before the due date of performance. The contract was held to be frustrated as it was impossible to conduct the concert. Neither party was deemed to be at fault and so no breach had occurred. A similar case were frustration occurred due to illness was that of Condor v. Barron Knights (1966). A member of the Barron Knights fell ill and was unable to perform but no breach of contract occurred. This is the case of Clause A above, if it has arisen by circumstance beyond control. However, in the case of Poussard v. Spiers and Pond (1876) the Plaintiff was enlisted to sing the lead female role in an opera. She fell ill missing the final rehearsals and four performances. Once recovered she tried to take her place but was refused by the defendant. It was held that the defendant was within their rights to repudiate as her action amounted to a breach of condition. The court found that "failure on the plaintiff's part went to the root of the matter and discharged the defendant."
Clause B is valid but again we would need more detail as to why failure to attend has occurred. Before a contract is made various facts and information that are relevant will be considered. From these specific terms and intentions will be agreed between the contracting parties often considering eventualities. The law distinguishes, therefore, between Conditions and Warranties. Conditions are major terms of the contract of ten known as the essence or root of the contract.
A warranty is "a term or promise in a contract, breach of which will entitle the innocent party to damages but to treat the contract as discharged by breach" (Oxford 1997). Warranties are less important obligations and a failure to perform does not undermine the roots of the contract. As I mentioned earlier we are unaware as to why failure to attend rehearsals would occur so we shall assume that it is due to illness as this is often a common reason. In the case of Bettina v. Gye (1876) Bettina was engaged to perform with an opera company. He should have attended six days of rehearsals but due to illness attended only three. As he recovered before due to perform, and was thus able to, it was found that he was in breach of warranty so this could be settled by damages.
SUMMARY
The area of law is a vastly complex subject, which is continually changing. New cases are being heard with often challenge the decisions made in similar instances thus causing changes in thought. The formulating and drawing up of contracts is clearly a specialist area and should only be embarked upon by our legal department. However, it is hoped that this report has given a basic insight to the minefield of Contract Law and that it may be used as source of reference to people at a later date.
WRITTEN BY
Karen Harper
Trainee Company Secretary.
February 2005
BIBLIOGRAPHY
Charman, Mary (2002) Contract Law
Dransfield, Rob (2003) Business Law
McKendrick, Ewan (2000) Contract Law
Oxford Dictionary of Law (1997)
Tudor, Tony (2005) HNC Business Studies Course notes
www.accountingweb.co.uk
KAREN HARPER FEBRUARY 2005
