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Contract Law

Contract Law in England

Contents

Acknowledgement

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Notes taken from IT Law, An ISEB Foundation

Contract Essentials

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A contract is an agreement that is legally enforceable.

The parties to a contract are free to decide upon the terms of the contract within the bounds of existing laws.

A contract exists when:

An Offer

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An offer is a statement made by a person wishing to enter into a contract.

An 'invitation to treat', in contrast to an offer, is when a person invites others to make an offer to him. Goods on a shelf in a supermarket can be considered an invitation to treat. A binding contract is only made when the goods are exchanged for money at the checkout. An advert in a newspaper and the goods advertised on a web site will generally be considered an 'invitation to treat'. Thus offers on websites are not binding until a consideration has been exchanged. A unilateral offer, is an offer made by a person that is capable of acceptance by anyone complying with the requirements set out in the offer - eg £10 to anyone who can install linux on an Xbox. An offeror can revoke the offer provided it is done before the offer is accepted and that fact is communicated to the offeree. An offer will come to an end once it has been accepted.

Acceptance and Counter Offers

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A contract will not be formed until the offer has been accepted.

An acceptance must be unconditional - any attempt to vary the terms of the offer will be considered as a counter offer. Acceptance must be communicated to the offeror. Silence will not constitute acceptance of an offer. However acceptance of a unilateral offer does not need to communicated. If an offer specifies the form or method of acceptance, then acceptance can only take place according to this specification. Two machines can enter into a binding contract on behalf of their owners - eg. automated responses. The Postal Rule and the Receipt Rule determine when an offer is sent and received.

Consideration

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In order for there to be a contract, a consideration must pass between the parties.

The consideration given by each party must be real and of some value, but not necessarily of equal value. The level of damages available in the instance of a breach of contract may be affected by the value of the consideration. A consideration made in the past cannot be used to form a contract at a later date. A consideration meeting an existing obligation cannot be used as a consideration for another contract.

Intention to enter Binding Agreement

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Both parties must have the intention to create legal relations for an agreement to become legally binding.

In social and domestic arrangements, it is presumed that there is no intention to enter legally binding relations unless the contrary is proved. In commercial arrangements, it is assumed the parties are intending to form a legally binding contract unless the opposite is proved. Making a document 'subject to contract' excludes it from legal enforcement. A contract may be void if its terms are uncertain: parties involved, subject matter and terms must be clear. The parties must have the capacity to enter into legally binding contracts: with regard to companies or partnerships this will be defined in their constitutional documents or partnership deed.

Contract Formation

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A contract is formed upon acceptance of an offer

Terms and conditions must be known at the time of acceptance, and do not apply if provided after the contract has been made. Accepting an offer subject to terms and conditions amounts to a counter offer. The last set of terms and conditions accepted generally become the terms and conditions of the contract.

Representations and Warranties

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A representation is a statement of fact. A misrepresentation is a representation that is false. Contract law will provide remedy for any misrepresentations made during formation of a contract. Silence will not constitute a representation, but a nod or a wink might. Omitting salient facts will constitute a misrepresentation. Misrepresentation may be classed as either:

Damages may be claimed for fraudulent or negligent misrepresentation. Contracts may only be rescinded for innocent misrepresentations. Rescission means returning both parties back to the position they would have been if the contract had not been entered into, which may require a payment being made to the party rescinding the contract

A warranty is a term within a contract which if not fulfilled may give rise to a claim for damages.

A condition is a term within a contract which if not fulfilled may allow a contract to be repudiated and allow for a claim for damages.

Remedies

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A contract is breached if one party fails to fulfil its obligations.

Damages granted for breach of contract are awarded such to return the innocent party to the position they would have been in if the obligation had been met. Parties claiming damages for breach of contract are under a duty to take action to minimise their losses. An award for damages does not oblige the other party to fulfil their contractual obligations. But one of two 'equitable remedies' may be sought:

An indemnity is an express obligation to financially compensate some defined loss or damage. Under English Law, it is not permitted to include a clause that imposes a penalty for failure to fulfil a contract obligation. Instead, a liquidated damages clause can be included. A liquidated damages clause is an agreement between both parties as to the financial cost of a failure to comply to an obligation and agreement to pay that amount should such failure occur. A party may also seek to terminate a contract.

Assignment, Novation and Third Parties

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A third party may not enforce the terms of a contract or have the terms of a contract enforced against them, unless acting as an agent or trustee for a party to the contract.

A party to a contract may assign a benefit, but not a burden, of a contract to a third party.

Contracts will typically restrict the rights of the parties to assign benefits to avoid forcing one party to have to deal with competitors

Novation means replacing one party to a contract with another, eg following a takeover or merger.

Electronic Contracts

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The normal rules of contract law apply to electronic contracts

The terms under which the contract is made should be clearly communicated before the contract is entered into. The Postal Rule does not apply to emails, so the terms should identify how the offer is to be sent and received.

Shrink wrap licences rely on the terms of a software agreement being read before the software is open, software is generally protected by a proviso that the packaging should not be opened until the license has been read and accepted by the user. Click-wrap, web-wrap and browse-wrap agreements use the same principle for on-line contracts - terms must be read and accepted before the contract is completed. Simply drawing the users attention to the location of the licence agreement is insufficient for these terms to be considered legally binding. Some mechanism must exist, eg tick box, for the potential user to indicate their acceptance of the conditions.

Regulation of Electronic Contracts

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The Consumer Protection (Distance Selling) Regulations 2000 (DSR) apply when a consumer enters into a distance contract - that is, when the vendor and purchaser are not both physically present when the contract is entered into. DSRs do not apply to:

Regulation 7 of the DSRs state that consumers must be provided the following before entering into a distance contract:

This information must be clear and comprehensible but does not need to be in writing. Additionally, regulation 8 specifies further information that must be provided:

Right of Cancellation

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Once a distance contract has been entered into and the consumer has been provided information required in Regulation 8, the consumer has a period of 7 working days within which to return the goods or cancel the the contract. The effect of cancellation means that the contract will be treated as though it had never been made, and thus should not incur charges on the consumer, except perhaps for the return of goods. Regulation 13 identifies the following exceptions to the right of cancellation:

Ecommerce Regulations

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The Electronic Commerce (EC Directive) Regulations 2002 regulate the provision of 'information society services' - services provided for remuneration at a distance by means of electronic equipment at the individual request of the recipient. The provision covers websites whose only source of remuneration is from the advertisements placed on the site. The regulations do not automatically cover subsequent Acts of parliament, nor do they cover data protection, tax, betting, gaming, or cartel law. Within the European Union, the ecommerce laws of a country apply only to companies established in that country. Exceptions to the 'country of origin' principle are made for:

  1. copyright and industrial property rights
  2. freedom of parties to choose the applicable law
  3. terms of consumer contracts
  4. real estate
  5. spam

Point 3 above means that for UK businesses, the terms of a consumer contract must meet the applicable laws of all the countries that the product can be purchased in. Regulation 6 sets out the general information that must be provided by a service provider:

Regulation 9 adds additional requirements for the provision of information regarding contracts entered into electronically:

If a service provider complies with the regulations, they will not be liable to third parties for damages. Specifically, service providers are not obliged to monitor the content on their service. Where monitoring does occur, there is a risk that the service provider may be considered as an editor or publisher of that content. Although a service provider is not obliged to monitor content, should they become aware of unlawful content then they must take appropriate access to remove or block such content.

Common Terms in Contracts

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Subject to Contract
Used where the parties wish to indicate that they have not yet entered into a legally binding agreement.
Time of the Essence
An obligation that must be fulfilled by a certain time. Failure to fulfil an obligation where 'time is of the essence', will give the other party the right to seek termination of contract and sue for damages.
Best Endeavours
An obligation to take such action as is commercially practical, and to incur any reasonable expense, but not an obligation to do everything possible.
Reasonable Endeavours
Does not require taking an action that would be financially or commercially damaging
Reasonable Skill and Care
The level of skill and care that would be expected from an intelligent person carrying out the task. Where a party claims expertise in a field, this will be taken into account. Lack of experience will not be taking in account.
Entire Agreement
An 'Entire Agreement' clause in a contract signals that the terms and conditions that apply are all detailed in the contract, and that no other conditions are to be found elsewhere. Entire agreement clauses will also specify that any previous agreements are superseded by the contract, but will not preclude liability in the case of fraudulent misrepresentation.
Indemnities
An express obligation to compensate for some defined loss or damage. A typical indemnity in IT contracts will guarantee intellectual property rights, for example Novell's indemnity against SCO's copyright claims to Unix
Limitation of Liability
The Unfair Contract Terms Act 1977 prohibits any clause that seeks to limit liability for death or personal injury resulting from negligence from either party to a contract. For this reason, contract terms limiting liability expressly state the limitations do not apply to death or personal injury resulting from negligence. The UCTA also forbids attempts to limit liability for negligence or for breach of contract except where this is reasonable. Attempts to limit liability must be clearly stated, and must clearly state the exclusions and limitations desired.
Notices
Define when a notice is sent and when a notice is received, and allows parties to a contract to override the Postal rule
Termination
Without a contract term to the contrary, either party has the right to terminate a contract giving the other reasonable notice. Most contracts will provide a definition of the period of notice required. There will also be clauses to allow for early termination, generally where a breach of contract occurs, a takeover of one party, insolvency of one party, or where a change of circumstances materially affects one parties ability to fulfil its responsibilities.
Force Majeure
Refers to events outside the control of a party that prevent that party from complying with its contractual obligations. A force majeure clause provides a mechanism to deal with such circumstances without terminating the contract. The clause will clearly define the circumstances that will bring Force Majeure in effect, the responsibilities to be fulfilled in such circumstances.
Confidentiality
There is no statutory law protecting confidentiality, so common law is generally used to protect parties that have confided in others as party of a contract. Confidential information must clearly be of a confidential nature, but simply marking information as 'confidential' does not guarantee that the courts will agree. Information provided in confidence can not be given to a third party without the express permission of the owner, unless in response to a court order or public duty of disclosure.
Governing Law and Jurisdiction
Where parties to a contract are based in different countries, the contract should contain a clause identifying the governing law and which courts will have jurisdiction (enforcement powers)
Letters of Intent
Often marked 'Subject to Contract', but have no legal status, and may be treated by courts as contractual agreements if one party has acted in reliance on agreements set out in a letter of intent.

IT Specific Terms

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Licences
A licence is a permission to do something that would otherwise be unlawful. To copy software that is protected by copyright, a licence (permission) must have been granted first. Generally a licence will grant rights to use software to a specified number of users for a particular purpose. Licences protect intellectual property rights.
Acceptance Testing
Acceptance criteria need to be clearly stated and will include reference to deemed acceptance when acceptance testing is delayed by the customer or where the software is used in production before being signed off.
Warranties
Most IT contracts will seek to exclude all implied warranties 'to the fullest extent permitted by the law'. Thus only explicit warranties or warranties required by law should apply.
Service Levels
Service levels in contracts must be capable of objective measurement and be realistic and will identify reparation for failure to meet these levels.
Intellectual Property Rights Indemnity
Designed to offer the customer protection from claims by third parties. The clause will clearly identify what intellectual property rights are owned by the supplier and to what extent they are being granted to the customer.
Source Code Escrow
Escrow agreement requires source code to be deposited with a third party as protection should the supplier fail to be able to meet its contract obligations for whatever reason

Typical IT Agreements

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Software Development

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A functional specification of a developed product should detail:

Late payments will entitle the payee to recieve interest under the Lat Payment of Commercial Debts Act 1998, unless some other provision has been contracted to cover late payment.

Software Licence

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A software licence is used to define the rights granted to the user and those retained by the owner of the software. The licence must clearly identify what is being licenced, and will typically include the software version number. Licences may be granted to specific number of concurrent users, installation seats or unlimited across an enterprise. A non-exclusive licence allows the software developer to licence the software to other customers also. The licence will also specify the duration of the licence period and include a intellectual property rights indemnity and appropriate warranties of suitability for purpose.

Software Maintenance

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Maintenance services agreements will cover:

Managed Service

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A service provider must clearly identify the service being provided, service levels including availability and security arrangements. Availability terms will normally cover arrangements for downtime and routine maintenance. The service provider must clearly identify authorised use of the service and protect itself from the use of the service for unlawful purposes. In the event that the service provision needs to be terminated, mechanisms should be identified to return the customers data in a useable form.