Using Commercial Contracts

A Practical Guide for Engineers and Project Managers

David Wright

• Publisher: Wiley
• Year: 2016
• Print ISBN: 9781119152507
• eBook ISBN: 9781119152545
• Edition: 1
• Topic: Law
• Subtopic: Construction Law
• Index: Law

Using Commercial Contracts: a practical guide for engineers and project managers examines how the law of contract operates, and the way in which the legal system interprets what a contract actually means. By giving clear, readable and expert advice on key legal issues, this guide provides the manager and engineer with an easily understandable and practical approach to the laws of contract.

Chapter 1
The Law in General

This book is about commercial, as opposed to consumer, contract law. It does not deal with questions of consumer protection and consumer rights. So it makes no reference to such matters as consumer legislation (which has culminated in the Consumer Rights Act 2015, coming into force at the time of writing and which promises to be of great importance), except where it affects contract law generally.

The book is about the law of England and Wales, though in practice the contract laws of the four other legal systems within the United Kingdom will not be much different. (They are the legal systems of Scotland, Northern Ireland, the Isle of Man and the Channel Islands.)

Law is based around the principle of the nation-state. Each country has its own legal system and its own laws. So a dispute under a contract subject to French law will be decided by the procedures and principles that govern French law, a contract subject to German law by German procedures and principles, and so on. An attempt a few years ago to combine sharia law with English law in a contract, Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd (2004), was rejected. The court stated that one cannot combine legal systems. (A judge under any other system would say the same.) However, the court did accept that it might well be possible for a contract governed by English law to incorporate a specific rule from another legal system.

A contract between two English companies carried out in England will be subject to English law, almost automatically, and any dispute will be settled in the UK. But with any trans-national contract there will be a choice. The choice decides which law will govern the contract and apply to any dispute, and perhaps also the place where that dispute will be decided. With most complex commercial contracts the broad outlines of law will be much the same in most countries. However, the detail may well be very different, and the dispute procedures will be different. The parties should make a conscious choice, not an accidental one. See the case of Entores v. Miles Far East Corporation (1955) in Chapter 4 below.

The point is covered by the Contracts (Applicable Law) Act 1990, and the Private International Law (Miscellaneous Provisions) Act 1995, with reference to Article 4(2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations. These provide that the law applicable to any contract should be governed by the ‘principal place of business’ of the parties, or one of them, unless under the terms of the contract performance was to be elsewhere, when another law might be selected. It was discussed in the case of Enstone Building Products Ltd v. Stanger Ltd (2004) which concerned a contract between two English companies for an investigation of building materials to be carried out in Scotland, with a report then to be submitted by the English office of one party to the other. No applicable law was stated in the contract. The court decided that the contract was governed by English law.

1. There are a number of preliminary points to remember.

1.1 A little understanding

Almost everyone can drive a car. Very few of us are skilled mechanics or physicists. We do not understand Newton's first and second laws of motion or how to take a car engine apart. We do not need to. But an understanding of the basics does help if the road is icy or the car has a mechanical problem. Contracts are just the same. Most of the time we do not have any difficulties, but the knowledge is useful, just in case.

1.2 Why contract law?

We live in a market economy. Almost every country in the world is a market economy, more or less. The economic theory behind the market economy is the maximisation of special skills. Everyone should concentrate upon his own special skills, then sell the results of those special skills and buy the results of other people's skills. In that way everyone can maximise his own output, and so the economy as a whole can prosper.

The contract is the basic tool of the market economy. It creates certainty that, barring accidents, a seller will deliver and a buyer will pay. It simply needs to have a clear set of rules and be supported by an efficient enforcement/dispute resolution system such as that of the courts or arbitration. The aim of the law of contract is to provide the rules.

Because the system needs contracts the process of making and managing the contract must not be too difficult. If it becomes too difficult, bearing in mind that the vast majority of contracts are either made by consumers who know little if anything of the niceties of the law or commercial people who are too busy to give more than the minimum time to the exercise, then the system will not work. So it is essential that the rules should be simple, and if they cannot be simple then at the least they must be fairly straightforward and easy to apply to the vast majority of real-life situations.

1.3 Commerce and judges

There is a significant difference between the judge and the organisation. The organisation must react immediately to a situation, or as nearly immediately as makes no difference. Sometimes it has to react without full information. A judge has the luxury of looking at a dispute with time at his disposal and with all the benefits of hindsight. Anyone reading the report of a commercial dispute that has gone to court over the past 30 to 40 years will realise that the events which gave rise to the litigation had happened usually at best some three or four years before the court hearing, and often much earlier than that.

The commercial organisation needs certainty. It needs to know precisely what obligations it has under the contract, and what powers it has to manage the contract. Every legal adviser will find himself faced with different varieties of the same question, on numberless occasions. ‘I have a contract; it has gone wrong; what can/should/must I do in these circumstances?’ This then leads to two further questions. ‘Am I in breach, or is he in breach, or are both of us in breach? Secondly, if he is in breach, am I entitled to a significant sum in damages, and, if I decide that I want to do so, can I terminate?’ The organisation needs to know the answers to these questions probably on the day the contract is signed, and certainly on the day when a breach occurs, because it must act correctly. If it does not, it may either lose a legitimate opportunity or risk being dragged into court by the other side.

In contrast to this a judge wants flexibility. When he finds himself faced with a dispute in court, one party will claim that the contract justified him in what he did and the other side will claim the opposite. The function of the judge is give a decision which is legally correct, but which will also produce a fair result in all the circumstances, based upon the evidence that the parties put before him. If all he can do is treat the contract as a rigid book of rules, then his ability to be fair is limited.

1.4 Dispute resolution

Many years ago almost every dispute ended in litigation, before a judge. Now that is not so. The great majority of disputes go elsewhere – to arbitration, adjudication, or, increasingly, mediation/conciliation, all of which are very much quicker. The advantage of litigation is a guarantee of the legal competence/quality of the tribunal. But its twin problems are time and cost.

1.5 Where does the law come from?

Contract law is what is called a ‘common law’ area of law. This means that most of the law that we have today was not created by parliament, but by the decisions of judges presiding over cases in the courts (over a period of 150 years or more). This has serious implications for the way the law works in practice.

It means that there is often no easy way for the layman to find out what the latest position is, first, because there is no easy point of access, second, because judges often discuss cases, not principles, and third, because the various law reports cover hundreds of thousands of cases. It can be equally difficult for the professional lawyer.

It means that rules can remain in place simply because of accident rather than because of intelligent design.

It also means that the development of the law is often haphazard. It depends to an unhealthy extent upon the cases that have actually come before the courts. Inevitably those cases come from the ‘difficult’ areas. No one can fail to be struck by the high proportion of cases originating in consumer protection, the shipping world, local government, building/civil engineering, liability insurance and the second-hand car trade. In contrast there are very few cases about disputes in the service, oil, electrical, mechanical, chemical/processing engineering, electronics or IT industries.

What is more, ‘normal’ disputes seldom come to court – they are settled by negotiation, mediation/conciliation, or perhaps arbitration or adjudication. If occasionally they do go to litigation they are usually settled before the court stage is reached. Many of the cases that come to court involve non-normal circumstances – fraud, sharp practice or total incompetence by one of the parties, a major shift in market values or a major accident or loss. This creates a difficulty for the judge – does he apply the law with cold, impartial objectivity, or does he try to give some degree of justice to the injured party? Judges are human beings like everyone else. The problem is that when judges try to be ‘fair’, they sometimes bend the law or facts a little. This affects the way the law is explained in judgments, with such judgments then creating the law.

1.6 Keeping law up to date

The common law precedent system has served the UK brilliantly, in the sense that judges of high quality have made decisions that have created a system of contract law that in general fits the needs of society.

But it does have one serious, if occasional, disadvantage. It cannot easily update itself. Every system needs to be updated, and law is no exception. Some decisions will be wrong. Some turn out to...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• About the Author
• Preface
• Foreword
• Cases Referred to
• Statutes Referred to
• Chapter 1: The Law in General
• Chapter 2: The Start – Using an Agent
• Chapter 3: The Organisation
• Chapter 4: Making the Contract Part 1 – The Requirements
• Chapter 5: Making the Contract Part 2 – Offer and Acceptance
• Chapter 6: Words in Contracts Part 1 – Words Used Pre-Contract
• Chapter 7: Words in Contracts Part 2 – Post-Contract
• Chapter 8: The Terms of the Contract
• Chapter 9: The Basic Framework – Contracts of Sale
• Chapter 10: Liability Exemption Clauses
• Chapter 11: Factors that May Invalidate a Contract
• Chapter 12: Illegal Contracts
• Chapter 13: Privity of Contract
• Chapter 14: Other Relationships
• Chapter 15: Preliminary Agreements and Letters of Intent
• Chapter 16: How the Contract Ends
• Chapter 17: Remedies for Breach of Contract and Defences to Claims
• Index
• End User License Agreement