I believe contract law has seven wonders. To this day, they remain crucial structures that form the foundation of contract law. Rooted in ancient wisdom, they continue to impact both legal practice and the evolution of other legal principles, yet may be overlooked from time to time.
Please join my brief tour of these seven pillar concepts. If you are a lawyer, I hope it serves as a handy refresher; if you are not, this will provide a useful glimpse into several core principles of contract law.
1. Parties’ “objective” intention.
When interpreting a contract, the court ascertains the parties’ intention at the time of the contract. However, the catch-all term “intention” can mislead as it tends to invite an inquiry into what a party actually meant. Unlike criminal law, where “intention” frequently denotes a person’s subjective state of mind, in contract law, the court does not examine or excavate your inner thoughts. Its task is to determine intention on an objective basis: not what you intended, but what a reasonable person would conclude you intended based on the words used in the contract and, if there’s ambiguity in those words, the surrounding circumstances at the time of the contract that will provide context.
The distinction between a subjective and objective analysis is foundational and shapes other contract law principles: for example, after-the-fact conduct or interpretations by a party that are self-serving will likely be regarded as shedding little, if any, light on the parties’ objective intention at the time the contract is formed.
2. The word “offer” matters.
The word “offer” is used loosely in everyday conversation, but it carries real legal force that must not be underestimated. In the context of contract law, an offer goes beyond a mere suggestion or an invitation to continue negotiation. It is a proposal made on terms sufficiently definite that, once accepted, converts into a binding agreement. That may sound elementary, yet it is a distinction sometimes obscured in practice. One sees a letter in settlement discussions which states “my clients intend” or “propose” to “resolve the dispute as follows…”, when the sender in fact intended to simply “make an offer on the following terms”.
Achieving simplicity and clarity does not mean blindly rejecting more complicated conceptual variations when applicable. An offer can, for example, be conditional, with performance contingent on specified conditions being satisfied. The point is that we should avoid imprecise word choices or conceptual inflation that creates avoidable disputes on whether a contract was formed at all.
3. “Agreement to agree”.
Many lawyers have heard the maxim “an agreement to agree is not a contract”. As a shorthand, it is vivid; as a statement of law, it is inaccurate. The cases draw a finer line. The real question is whether the parties reached agreement on the essential terms and intended to be bound immediately upon their meeting of the minds, even if they also expected to sign a more formal document later to document the bargain that already exists. If so, the lack of the subsequent act of signing will not invalidate the contract. Furthermore, courts tolerate a measure of uncertainty where some missing details can be resolved by an objective standard, such as established practice or customs.
Conversely, if the parties clearly intended that no binding agreement would arise until a more formal contract was signed (for example by adopting the terminology “subject to contract” in their communications), there would be no binding agreement, even if at some point of the negotiation process the business terms appeared to have been agreed.
4. “You breached the contract, so I can now terminate it”.
That assumption is dangerously intuitive. Again, it is oversimplistic. In contract law, a breach does not automatically entitle the innocent party to elect to terminate the contract. Whether termination is available depends on factors such as the seriousness of the breach, and whether there are express provisions in the contract that govern any remedies flowing from the breach. (Such provisions may or may not be enforceable: see section 5, penalty clause, part B of this article). In sale of goods for instance, breaching a “condition” (a term regarded as essential to the bargain) may entitle the innocent party to terminate and pursue damages, whereas breaching a “warranty” will only result in damages.
The assumption is dangerous because if the contract remains alive, the innocent parties must still perform their contractual obligations. Decisions made in the heat of a contractual dispute should therefore be approached with a great deal of care. A wrongful attempt by an innocent party to terminate the contract, or failure to live up to their end of the bargain while still contractually obliged to do so, will itself amount to a breach of the contract, turning the innocent party into the wrongdoer.
(Part B of this article will move on to the concepts of penalty clause, “fundamental” breach, and repudiation – to be released soon).
Chit Leung