Contracts for consumers (excluding product liability)

Primary Content Source: Tara Thapar



1.       What is a contract?

We enter into contracts on a daily basis, often without even knowing that we have done so. A contract is a binding promise to do something in exchange for something else. A contract doesn’t need to be written on paper and signed in ink. It can be verbal, written or even implied by our actions – this includes even by email and text message! For example, when we agree to pay our electricity provider to provide us with electricity to our homes, these services are performed by the provider on the basis of a contract between us and the provider.

However, some contracts need to be in writing and formally signed such as property-related contracts such as lease agreements or agreements to transfer land. In these situations, it is recommended to seek the advice of a solicitor to ensure that these contracts are legally valid as they require certain formalities to be carried out. 

As a general rule of thumb, it is advisable to put the agreement in writing in any case because this helps parties remember what has been agreed and in case things go wrong later, allow a party to seek resolution of an issue related to the contract.

In this set of FAQs, we will refer to a person as a “party”.

2.       Why should we enter into contracts?

Firstly, having a contract provides certainty to an arrangement, because both parties understand what is expected for them. For example, “I will sell you this pen if you give me £1.”

Once you enter into a contract, there are legal requirements as to how you can expect the other perform their side of the bargain. In addition, you have rights under law in case something goes wrong with your arrangement and you need to fix the problem. 

A contract allows you to hold the other party to their promise, therefore you can ask courts, arbitrators or mediators to help you enforce the contract and obtain a solution for the other party not performing the contract properly.

3.       What sort of contracts do we come across every day?

You may already know about some contracts that you have entered into in your daily life. These include:

1. Property-related contracts such as a lease to rent your home or you could enter into a sale and purchase contract to buy a house. You may also enter into a consumer hire agreement when agreeing to hire a car for a certain amount of time.

2. Mortgages, when you wish to buy a property and do not have the cash at that time to pay for the full value of the property. Therefore, you may enter into a contract with a bank or building society to provide you with a certain amount of money to allow you to buy the property but you promise to repay the bank with an agreed amount of interest within a certain period of time.

3. Utilities contracts, when you agree with a utilities provider to supply you with electricity, water, gas, internet or telephone services to your home in return for a payment either at a fixed rate or a rate according to how much of the service you consume.

4. Employment contracts, when you agree with an employer to engage in full time work for a particular job in return for a salary and certain benefits such as private medical insurance, pension etc.

5. Purchase of goods, when you buy an item from a shop such as groceries from a supermarket or new trainers from a sports shop.  

6. Technology licences, when you agree to use software or an app in return for payment or the use of your data or content such as pictures or videos, by the owner of the software/app.

4.       How do I know that a contract is legally valid?

There are certain elements that are required in order for a contract to be legally valid under English law. These elements are detailed below.

1. Offer
   Someone needs to make an offer to another person about a particular arrangement. For example, “I offer you this blue pen for £1.”

   Whoever makes the offer has to intend to be bound by this offer. What this means is that the offer has to specific enough to constitute an offer. Therefore, saying generally to a large group of people that “I’d like to sell this blue pen”, is not an offer, it is an invitation for offers. It is too vague to be considered a promise. Similarly, displaying goods in a shop is not an offer because it’s not specific enough. I need to say, “I offer you, Tom Smith, this blue pen for £1” to be an offer.

   You don’t always need to expressly make an offer verbally or in writing – sometimes an offer can be implied by your conduct. For example, a bus service that takes a pre-determined route and stops at a particular bus stop, makes an implied offer to take passengers who have an appropriate ticket to use that bus service.

2. Acceptance
   Once a valid offer has been made, there needs to be valid acceptance of that offer. What this means is that you need to agree to the offer made without any changes to the offer.

   For example, if the offer is “I sell you this blue pen for £1”, you accept by saying, “Yes I agree to buy this blue pen from you for £1.”

   Not, “I agree to buy this red pen from you for £1.”

   Saying that you would like to buy the red pen instead of the blue pen, would be considered a counter offer, that is, a new offer, not acceptance of the original offer.

   It may be valid acceptance if your saying “red pen” was a genuine slip of the tongue and this is proven by follow up discussions you have with the seller where you clarify that you intend to buy the blue pen.

   However, if you genuinely intend to buy the red pen and not the blue pen, this is a new offer and the seller would therefore need to accept your offer by saying, “Yes, I will sell you the red pen for £1.”

   It’s also important for the acceptance to be communicated to the seller in some way – there has to be certainty that you have accepted the offer. You can verbally accept as in the example above or, you can accept the offer by your conduct. For example, in response to the seller’s offer, you nod and pay them £1 in return for the blue pen.

3. Consideration
   In order for a contract to be legally valid, there has to be what is called “consideration” for the contract. This means that there has to be some sort of payment by one party for the performance of services or provision of goods by the other party.

   Payment can include money, but can be anything of value such as another item or service of value. For example, I could sell a new car in return for a painting of similar value. The caveat to this is that the payment should be sufficient to pay for the services/goods in question. For example, payment of £1 for a new car would not be sufficient but £10,000 would be.

4. Intention to create legal relations
   Both parties have to intend to enter into a legally binding contract. If one party does not believe that they are entering into a valid agreement including legally enforceable rights and obligations for both parties. For example, if they think the contract is a joke or that they’re not entering into a “real” contract, then the contract cannot be valid.

   Under English law, it is assumed that there is no intention to create legal relations in certain circumstances, for example, in relation to contracts between family members or between friends. For example, a promise by a parent to a child to pay the child an allowance would not be legally binding.

   The exception to this is where there is clear evidence that the parties intended to be bound by law. For example, a separation agreement between estranged spouses to pay maintenance from one spouse to another will be valid. Another example of a legally valid contract would be if a friend sold their business to another friend.

   For commercial agreements involving the sale and purchase of commercial goods and services, it is assumed under English law, that there is an intention to create legal relations, unless there is evidence to the contrary that one party did not intend to be bound by law to perform their obligations under the contract.

5. Legal capacity of parties
   It is generally assumed under English law that two parties have the “capacity” to enter into a contract. This assumption falls away when either party (or both parties) is a minor or is deemed mentally incapacitated. Therefore, if a minor enters into a contract (without being represented by a legal guardian, then that contract may be invalid and cannot be relied upon, or even enforced by a court.

   The exception to this is that there are some “essential contracts” that minors or those who are deemed mentally incapacitated may enter into which remain invalid. These essential contracts include contracts involving the sale and purchase of necessities, such as food, clothing, medicine and other things necessary for them and their lifestyle, or for employment, or for their education, where the terms of the contract benefits the minor or party who is deemed to be mentally incapacitated. The terms of these essential contracts must be fair to be legally valid. For example, the price paid by the minor under the contract should be reasonable.

6. Legality
   It is important to note that a contract must not be against the law, in order to be legally valid. What does this mean? It means that a contract for illegal services is not a legally valid contract. For example, if you enter into a contract to buy illegal drugs from a supplier, you cannot rely on the law to enforce your contract, as the subject matter of your contract (i.e. the illegal drugs) is against the law. In other words, a contract to do something illegal is not a legally valid contract.

5.       What are the key things I should look for in a written contract?

a.       Party names

It is important to know who is entering into the agreement so that it is obvious who is doing what under the contract. This can be a simple reference to the names of the parties – for example, “John Smith” and “James Jones” or for companies, “Company A Limited” and “Company B Limited”. For greater clarity, it is advisable to also add contact details of the parties as it may be difficult to pinpoint a party based on their name alone, as there may be many John Smiths or Company A Limiteds!

So for example, the contract should reference, “John Smith, of 10 Example address, City, Country, Postcode.”

b.       Description of services/goods

Contracts must be certain so that both parties know what they need to do in order to perform the contract. Therefore, it is important for contracts to clearly set out what the goods or services are that are being provided by one party to another.

This is for a number of reasons. Firstly, as above, the offer and acceptance of that offer are key elements of a valid contract so there needs to be certainty that offer and acceptance of that offer have actually occurred. As above, if the parties disagree on what goods or services as to be provided, there is a danger that the offer has not been accepted at all and that there is no valid contract between the parties.

Also, understanding what goods or services are to be provided under the contract will avoid any misunderstandings in the future between the parties and potentially, a costly court case!

The description of the goods or services needs to be sufficiently clear and detailed so that both of the parties’ expectations are met. For example, if one party believes that they will provide a blue ballpoint pen to the other party, BUT the other party believes they will receive a blue fountain pen, this miscommunication should be cleared up and clarified in the contract.

c.       Timing of services/delivery of goods

As above, it is necessary to clearly set out when the goods or services will be provided so that there are no misunderstandings in the future between the parties.

For example, will the blue pen be provided in a week from signature of the contract or on a particular date? Will this be a subscription service where a blue pen will be provided from one party to the other on a weekly/monthly basis? Or, will the blue pen only be provided to one party if that party completes a specific action – for example, the seller will provide the blue pen if the buyer visits the seller’s pen showroom?

d.       Consumer-related terms

Under English law, for contracts involving consumers, there are certain requirements that automatically included in these contracts (or “implied terms”). These requirements were put in place by the Consumer Rights Act 2015.

The most notable requirements are as follows:

               i.      Goods must be of satisfactory quality, as described in the contract and fit for the buyer's particular purpose.

             ii.      Consumers have the right to reject defective goods within a minimum of 30 days.

           iii.      Goods include digital content (such as paid for videos of television shows and film, and audio files of songs, podcasts or audiobooks, and including any freemium software) but for defective digital content, the seller must repair or replace the digital content. If the seller does not do so, they must reduce the price payable by the buyer or provide a refund of the amount paid for the digital content. The seller is also responsible for any damage caused to the buyer’s device by the digital content, if the seller has not exercised reasonable care and skill in providing the digital content. This may include the responsibility of the seller to take precautions in ensuring that the digital content is provided without known viruses. The buyer also has the right to claim damages for any losses they have suffered relating to the digital content.

           iv.      Services must be performed with reasonable care and skill and within a reasonable time. Also, anything a buyer says when the seller is deciding to enter into the contract or making a decision about the service after entering into the contract becomes part of the contract.

             v.      Consumers have the right to require the seller to repeat the services or provision of the goods if the services/provision of the goods is defective. Consumers also have the right to require sellers to reduce the price for defective services/goods.  

           vi.      Unfair terms included in a contract are considered invalid. Unfair terms are where the terms causes “a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer." The key terms that may be considered unfair are:

• Significant fees when the buyer decides to cancel a contract.

• Allowing the seller to make decisions about how the goods/services will be provided after the contract is agreed.

• Allowing the seller to vary the price after the buyer has agreed to the contract.

e.       Payment

You will remember from above that consideration is a key element of every contract. Therefore, it is important to set out in each contract what this consideration will be in return for the goods/services provided. As above, this can be a payment of money or anything of value.

Normally, this will be very straightforward to set out in a contract. If the payment is to be determined at a later date, it is important to set out what the process will be for determining the payment. You may agree that the parties will confirm by email what the payment will be after a specific event occurs. Be careful of agreeing the payment at a later date (i.e. after the contract has been agreed) because the contract may be invalid if there is no consideration at the time of agreeing the contract. Also, under English law, a term that says that the party will agree further terms in future (also known as a “agreement to agree”) is not an enforceable term. This means that if the parties don’t agree these further terms, the agreement to agree will not be valid.  

f.       Contract start and termination

The beginning and ending of a contract should be clearly defined in a contract so that the parties know when they need to start performing their obligations under the contract, and, when their contractual rights are in effect.

For example, the contract start date can be a specific date or when the contract is agreed.  It may be possible to determine that the start date will be after an event has occurred but beware of using this method to determine the start date as this introduces ambiguity into the contract – this has the potential to create misunderstandings between the parties and increases the risk of a disagreement in the future.

Equally, the end date of the contract, or “termination” can be a specific date, after the expiry of a certain period of time (e.g. 12 months from the contract start date) or when the goods/services have been delivered. As above, you can agree that the contract will terminate after a specific event occurs, but please note the warning above about this possibly creating ambiguity and potential disagreements between the parties in future.    

There may be other terms in the contract that relate to the termination of the contract. For example, it is very common to specify that the contract will terminate if one party does not comply with their obligations in a significant way (i.e. “material breach”) or if one party becomes bankrupt or undergoes some other insolvency procedure and so cannot make payment under the contract.

It is also important for both parties to consider what should happen when the contract ends. Usually, parties will specify that when the contract ends, the provision of goods/services to a party will end or any outstanding payments will be made by a party to the other. Also, if there is any sensitive information that one party holds about the other related to the contract (i.e. “confidential information”) such as the price for the goods/services, business information or personal data, it is common to specify that this information will be destroyed or returned to the owner of the information when the contracts ends.   

g.       Liability

For simple contracts, there usually will not be a provision setting out who is liable for what because under English law, whoever does not comply with their obligations will have breached the contract and will be liable to pay for the reasonable consequences of their breach (see section 6 below).

For commercial contracts, there is usually a provision excluding certain types of losses, for example losses that were not foreseeable by either party at the time of agreeing the contract. Often, there will be a provision where the amount that the breaching party has to pay to the other in compensation (also known as “damages”) to limited to a certain amount. This is so that the parties can determine the monetary value of their total risk under the contract i.e. if things go wrong.

Please note that under consumer contracts, the commercial entity providing goods or services cannot exclude or limit certain types of liability such as personal injury.  

6.       What happens if things go wrong?

There are certain solutions available to a party if things go wrong under the contract – specifically, where a party does not hold up their end of the bargain. Sometimes, these solutions (known as “remedies”) are specifically detailed in the contract or they are implied by law (see section 5D above, “Consumer-related terms”).

Some common remedies are as follows:

a.       Refunds

As you will see in the “Consumer-related terms” section above, consumers have the right to require a refund from sellers in relation to defective goods or services.

Sometimes, a contract will specify that the buyer will be entitled to a refund in certain circumstances. For example, these circumstances may be where the goods were already broken when they were provided to the buyer and the buyer lets the seller know within a set time frame. Often, if the buyer is allowed to claim a refund, there will be a set process to do so, such as to email the seller at a particular email address with proof of purchase. In addition, the seller will often specify in the contract that the buyer is not entitled to any other remedy if a refund is provided. For consumer contracts, this may not be valid as the Consumer Rights Act 2015 allows consumers to claim other remedies in case of defective goods/services (see section 5D above, “Consumer-related terms”).

b.       Termination

As above (section 5F, “Contract start and termination”), the contract should set out when the contract ends. In addition, there may be other terms in the contract that relate to the termination of the contract. For example, it is very common to specify that the contract will terminate if one party does not comply with their obligations in a significant way (i.e. “material breach”) or if one party becomes bankrupt or undergoes some other insolvency procedure and so cannot make payment under the contract.

Even if the contract does not set out these other circumstances where the contract will terminate, under English law, if a party materially breaches the contract, the other party can terminate the contract and claim compensation for their losses relating to the breach.   

c.       Damages

If a party breaches the contract, the other party might be able to recover compensation (or “damages”) for their losses relating to this breach. Damages are intended to ensure that the non-breaching party is placed in the position they would have been in, if the contract been performed properly by the breaching party. For example, if the seller of the blue pen did not provide the blue pen to the buyer but took payment for the blue pen, appropriate damages would be the refund of the payment. It could also include payments of court fees that the buyer had to pay to recover these damages from the seller.

There are some points to note when considering if damages will be payable by the breaching party to the non-breaching party:

• The non-breaching party’s losses have to be caused by the breach (known as “causation”). For example, the buyer of the blue pen lost the amount they paid the seller for the blue pen;

• The non-breaching party has to take reasonable steps to “mitigate” their losses. This means that they need to limit the impact of the breaching party’s breach. For example, if they intended to rent out the blue pen to another person and that other person is charging them a daily penalty for not providing them with the blue pen, a way for the buyer to mitigate their losses would be to buy another blue pen to rent out, so they limit having to pay the daily penalty to the other person.

d.       Specific performance of the contract 

 If damages are not sufficient to compensate one party for the other party’s breach of the contract, a court may decide to order “specific performance of the contract”.

What does this mean? Specific performance is an order by the court requiring one party to perform a specific obligation that they have in the contract. For example, if a party is an internet service provider and did not provide internet access to the buyer, a court may order that the internet service provider provides internet access to the buyer as promised in the contract.

Courts will consider a number of factors before they order this and generally will not do this unless the judge decides that damages are not an adequate remedy for the specific breach of contract.

e.       Penalties/liquidated damages  

Sometimes, two parties to a contract might decide to include what is called “liquidated damages” into the contract. This is an agreed amount of damages to be paid if one party breaches the contract. Parties might agree this for certainty – they know that if a party breaches the contract, the other party will receive a set amount in compensation without having to spend a lot of time and effort in court and for the judge to decide what is an appropriate amount.

Under English law, this type of clause is not usually valid and courts will not enforce it as it is considered very onerous and may not take into account the circumstances and consequences of the breach. The exception to this is where the amount agreed is a “genuine pre-estimate of loss”. This means that the parties have carefully assessed what would be a party’s loss if the other party breached the contract and estimated that the agreed amount would be sufficient compensation. If the agreed amount is not a genuine pre-estimate of loss, but is intended to essentially punish a party for breaching the contract, this is called a penalty and is not enforceable by the courts.

The risk is that if a liquidated damages clause is included in a contract, and there are other remedies in the contract as well, such as damages, a party may pay twice in compensation to the other party for the same breach of contract.