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AN OVERVIEW OF CONTRACT LAW

A contract is a legally binding agreement setting out the rights and obligations of the parties involved.

The word “contract” is often misunderstood as it suggests a formal written document. However, according to the law a contract can be made in writing, orally or by conduct.

Although verbal contracts are enforceable, it is always prudent to have a written document setting out the terms which can then be used as evidence if there is a disagreement later. The Legal Stop offers a wide range of downloadable contract templates and fixed fee bespoke documents drafting, please visit our website for all your legal needs.

A contract is made only when four criteria are satisfied. They are:

  • Offer
  •  Acceptance
  • Consideration, and
  • An intention to create legal relations

Offer

An offer is a promise by one party to enter into a contract on certain terms. It must be specific, unambiguous and capable of acceptance and made with the intention of being accepted. An offer can be made to an individual, a group of persons or even to the world at large and may be spoken, written or implied by conduct.

An offer must be distinguished from an “invitation to treat”, which merely invites the other party to make an offer and does not carry the intention of being bound. An example of an invitation to treat is a display of goods in a shop. The offer to buy is therefore made by the customer and the shop is free to decide whether or not to accept the offer.

An offer can be cancelled at any time before it is accepted by the other party. If the other party decides not to accept the offer, then they cannot change their mind and accept it as the offer is regarded as having been terminated.

Acceptance

Acceptance must be made in response to the offer and must correspond with the terms of the offer and it must be communicated to the other party to the contract. An offer can be accepted by a communication to the person making the offer or by conduct. Acceptance by communication can include any clear indication to accept the offer as long as this is communicated to the person making the offer. It is therefore established law that acceptance can occur by clicking ‘I accept’ on a website or even sending an e-mail.

Sometimes, rather than accept an offer, a party may decide to make a counter-offer. This will amount to a rejection of the original offer so no contract is made. It will amount to a new offer and the person who made the original offer can then choose whether or not to accept it. Where a counter-offer is accepted then those terms rather than the original terms proposed will be the terms of the contract. If this occurs it is often termed “the battle of the forms” and it will often be difficult for the court to determine which set of conditions prevail.

The general rule is that an acceptance is not effective until it is communicated to the other party who made the offer. There are two rules on acceptance:

  1. The reception rule: it covers situations which involve instant communications such as telephone conversations, face to face negotiations, etc.
  2. The postal rule: as a general rule an acceptance must be brought to the attention of the person who made the offer. However, communication through the post is an exception to this rule. The postal rule is that acceptance is deemed to be effective at the time of sending. This is the position even if the letter is lost or delayed in the post provided of course it was correctly addressed. However, it is always advisable to obtain proof of posting to reduce the risk of disagreement at a later date.

The difficulty in relation to contracts formed via a website in relation to electronic communications is regarding whether or not the postal rule applies. Please note that the Electronic Commerce Regulations 2002 require suppliers to clearly state how an electronic transaction governed by the regulations is to be completed. If an offer does not specify the method of acceptance then it can be done by any way chosen.

Consideration

If a contract lacks consideration then it can only be enforced if it is made by deed. To be considered “good consideration” it must have some value even if, in the context of the agreement, it is only a nominal amount.

As a general rule, past consideration is no consideration. If a party is merely discharging a pre-existing obligation then there is no consideration for it. An example is where A is owed £20 by B and agrees to accept £10 instead. A is not precluded from later asking B for the balance of £10 as there was no consideration for accepting a lower sum because B was already under an obligation to pay the original amount.

Intention to create legal relations

The final point required in order to make a valid contract is to show that the parties intended to create a contract. In commercial transactions there is a rebuttable presumption that the parties intend their agreement to be legally binding. Common ways of rebutting this presumption are by the parties writing comfort letters, letters of intent or by using the words “subject to contract”.

Letters of comfort are used in loan finance transactions. They are issued by third parties and are often given to banks in relation to loans and are letters which provide encouragement or comfort to the lender to proceed with the loan.

Letters of intent are frequently used when negotiating mergers and acquisitions. The main purpose is to record a non-binding outline of the terms that the two parties have agreed.

The use of the phrase “subject to contract” is also used to rebut the presumption of contractual intent. It means the parties have not yet reached an agreement and are still negotiating.

Provided the elements of offer, acceptance, consideration and intention to enter into legal relations are present then a contract will have been formed. Thus, an oral agreement which satisfies these conditions will amount to a binding contract and each party will then be able to rely on those terms, and if necessary can take appropriate action to enforce these.

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How to Enforce Judgement

Even if your legal action is successful, you may need to enforce judgement against the other party because they still fail to pay you.

You can apply to the court for an order to obtain information from the debtor about their financial circumstances, which involves them going to court to be questioned under oath. The type of information you can ask for includes:

  • details of employment status (such as employer and earnings) and any other income;
  • details of dependants and any outgoings paid from income;
  • whether they own any property which could be sold to meet the debt; and
  • whether they hold any money in bank or building society accounts.

This information will give you a clearer picture of whether it’s worth enforcing judgement against them.

If you decide to proceed with enforcing judgement, the following options are available:

Warrant of execution  

This allows court bailiffs to take goods from your debtor’s home or business and the goods will be sold at auction.

Attachment of earnings order

This usually applies to an individual person in employment.The employer is ordered to make deductions from the person’s wages or salary.

Third-party debt order

This is where the court orders a ‘freeze’ on money held by a person, institution or organisation, which might otherwise be paid to a defendant against whom you have a judgement. The order will prevent withdrawal of the money until the court decides whether all or part of it should be paid to you.

Charging order

The court places a ‘charge’ on the debtor’s property which is equivalent to the amount you are owed. A charging order does not oblige the debtor to sell their property, but if they do, they must pay you before they can take the rest of the proceeds.

Receiver

If you believe that you can’t recover your debt using the methods above, you can apply to the court to approve a receiver, who you have selected, to conduct an ‘equitable execution’. This involves the receiver collecting money which the debtor is owed by other people, such as rent due on properties they own, in order to repay you.

Winding up or bankruptcy

As last resort you can apply for a bankruptcy or winding-up petition, to stop the individual or business from continuing to trade.

 

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PARTNERSHIPS: A GUIDE

A partnership is where two or more persons, the partners, enter into business together and share the risks, costs and responsibilities of being in business. A partner can be an individual or another business e.g. a limited company or another partnership.

There are three types of partnership:

  1. Ordinary Partnerships – an ordinary partnership does not have legal existence separate from the partners. Consequently in the eyes of the law it is not a separate legal entity like a company. Unlike the directors of a limited company, partners in an ordinary partnership have personal liability for all of the debts of the partnership.

In an ordinary partnership if the partnership has debts, the partners are jointly liable for the debt owed and so are equally responsible for paying off the whole debt. Creditors can claim a partner’s personal assets to pay off any debts, even those debts caused by other partners. Therefore, in an ordinary partnership the partners’ personal assets are not protected in the event that the business fails.

  1. Limited Partnerships – a limited partnership is made up of a mixture of ordinary partners and limited partners.

In a limited partnership ordinary partners are jointly liable for any debts owed by the partnership and so are equally responsible for paying off the whole debt. However a limited partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

  1. Limited Liability Partnerships (LLPs) – a LLP is a hybrid between a company and a partnership in that LLPs must register with Companies House, send Companies House an annual return and file accounts with Companies House.

LLPs have the advantage of limited liability, partners are not personally liable for the debts of the partnership. In a LLP a partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given. Thus partners have some protection if the business fails since the partners’ personal assets are protected to a certain extent.

A Partnership Agreement is a contract between the partners of a business.

There is no legal requirement to enter into a partnership agreement as the law will automatically impose a default set of rights and obligations to govern the partnership and the relationship between the partners if they don’t. Consequently partnership agreements are voluntary; they set out the rights and obligations of the partners and regulate the relationship between the partners with the aim of protecting the partners’ investment in the business.

In order to avoid costly disputes we recommend to enter into a written partnership agreement as it lets the partners know where they stand in relation to each other and the business. Also, since in the absence of a written partnership agreement the law will impose a default set of rights and obligations on the partners, having a written partnership agreement in place gives the partners the opportunity to vary or exclude the default position.

A partnership agreement sets out detailed and practical rules in respect of the partnership and its partners. Generally the agreement will:

  • regulate the partners’ investment in the business;
  • protect the partners’ interests and secure the future of the business;
  • set out whether property used by the partnership belongs to the partnership or to individual partners;
  • provide a written structure for the business clearly setting out each partner’s responsibilities, rights, profit/liability sharing, rules relating to business entry and exit, and also the terms on which disputes are resolved and the partnership can be terminated;
  • set out how the partnership is going to be run;
  • regulate how important partnership decisions are to be made, and
  • help avoid costly misunderstandings and conflicts.

A partnership agreement will make the day-to-day operation of the partnership smoother and prevent problems from escalating into full-blown crises. It formalises the partnership arrangements allowing the partners to agree on how to handle particular situations before they arise. A badly drafted or non-existent partnership agreement may expose partners to a range of potential issues, leading to an unsuitable business structure and ultimately to partnership dissolution.

The Legal Stop has a several partnership agreements each fully comprehensive and specifically drafted for the particular type of partnership that you are intending to establish, whether an ordinary, limited or limited liability partnership. For more information please visit our website www.thelegalstop.co.uk.