Types of business contract

In this chapter we move away from studying basic principles of general application to all contracts to look at specific kinds of contracts in common use in the business world. The fundamentals of the law of contract are still largely governed by the common law. Over the past 100 years, however, business transactions have increasingly become subject to statutory provisions. Parliament’s original aim was to translate established common law rules into a format which would be more accessible and understandable to businessmen. As the years passed, so the legislators’ motives changed. Parliamentary interest in commercial law over the last century has been prompted mainly by the need to regulate and control unfair business practices.

It is important that you can distinguish between different kinds of business transactions because different legal principles apply to each. The rights and duties of the parties will be determined by the nature of their contract and the legal rules which govern that particular kind of agreement. For example, contracts for the sale of goods are covered by the Sale of Goods Act 1979, as amended by the Sale and Supply of Goods Act 1994, the Sale of Goods (Amendment) Acts 1994 and 1995 and the Sale and Supply of Goods to Consumers Regulations 2002 (SI 2002/3045), while contracts for the sale of land are governed by the Law of Property Act 1925, as amended by the Law of Property (Miscellaneous Provisions) Act 1989. This chapter is designed to provide you with a brief guide to the different kinds of business contracts and the source of any legal rules which regulate them. The most important contracts will be considered in more detail in later chapters.

Contracts for the supply of goods

Sale of goods

The most common form of transaction in the business world is a contract for the sale of goods. Whenever you buy goods, whether from a supermarket, market stall, doorstep salesman, by mail order or using the Internet, you have entered into a contract for the sale of goods. As we have already mentioned, the rights and duties of the parties to this type of contract are set out in the Sale of Goods Act 1979 (as amended). The Act applies to all contracts for the sale of goods, from buying a sandwich at lunchtime to a multi-million-pound deal to supply new aircraft to an airline company. A contract for the sale of goods is defined in s 2(1) of the Sale of Goods Act 1979 as:

A contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price.

This definition is extremely important because only those contracts which fall within it will be covered by the provisions of the 1979 Act. A closer look at the definition will help you distinguish a contract for the sale of goods from other similar kinds of contracts in which goods change hands.

Section 2(1) covers two possibilities: an actual sale and an agreement to sell at some future time. The essence of the transaction is the transfer of property in goods from the seller to the buyer. (‘Property’ in this context means ownership of the goods.) Goods include all tangible items of personal property such as food, clothes and furniture: land and money are excluded from the definition. The consideration for the goods must be money, although a part-exchange deal in which goods are exchanged for other goods plus money will be covered by the Act because some money has changed hands.

Exchange or barter

No money changes hands in this type of contract. Instead there is a straight exchange of goods between the parties. The absence of money from the consideration means that the Sale of Goods Act 1979 does not apply to these contracts. Previously the obligations of the parties were governed by the common law, but now the Supply of Goods and Services Act 1982 (as amended by the Sale and Supply of Goods Act 1994) imposes certain statutory duties on the supplier of goods under a contract of exchange.

Work and materials

Another way in which you can acquire goods is in consequence of a contract whose main purpose is the provision of services. If you take your car to be serviced by a garage, the main substance of the contract is the skill and labour of the mechanic in checking the car. The supply of such items as brake fluid and the renewal of spark plugs is an ancillary part of the contract. The distinction between a contract of sale and a contract of work and materials is often a fine one.

However, a contract to buy a painting from an art gallery would be a sale of goods contract. Contracts for work and materials are now subject to the Supply of Goods and Services Act 1982 (as amended by the Sale and Supply of Goods Act 1994 and the Sale and Supply of Goods to Consumers Regulations 2002).

Supply of goods on credit

There is a bewildering number of ways in which goods can be acquired and then paid for over a period of time. Hire-purchase, ‘interest-free’ credit, credit cards and bank loans were all readily available before the ‘credit crunch’, enticing us to buy more than we could probably afford. Consumer credit – credit granted to an individual, sole trader or a small partnership of two or three partners – is strictly regulated by the Consumer Credit Act 1974 as amended by the Consumer Credit Act 2006. The more important forms of consumer credit agreement are described below.

1 . Hire-purchase (HP). This is one of the best-known ways of buying goods on credit. HP is essentially an agreement for the hire of goods, at the end of which the hirer may exercise an option to purchase them from the owner. The hirer obtains the immediate use and enjoyment of the goods, but he does not become the owner unless and until all the instalments are paid. There is a subtle distinction between HP and a contract for the sale of goods. You will remember that the definition of a sale of goods includes agreements to transfer the ownership in goods at some time in the future. An HP agreement, however, does not bind the hirer to buy. He or she may choose to pay for the hire of the goods and then decline to purchase them.

2 . Conditional sale. A conditional sale is very similar to HP. The customer obtains immediate possession of the goods in return for the payment of regular instalments. The transfer of ownership is delayed until some specified condition is fulfilled. The difference between the two agreements is that the buyer under a conditional sale agreement is committed to buy from the outset. Thus, a conditional sale is really a type of sale of goods contract.

3 . Credit sale. This is another way of buying goods and paying for them later. Unlike HP and conditional sale agreements, ownership of goods passes to the buyer at the start of the agreement.

A contract of bailment arises when the owner of goods (the bailor) entrusts possession of them into the care of another (the bailee). Examples of bailment include placing important documents in safe custody at a bank, taking clothes to be dry-cleaned and hiring a TV set. The bailee’s main duties are:

·         to take reasonable care of the goods whilst they are in his or her possession; and

·         to return them to the bailor, at the end of an agreed period or when requested.

Hiring is a particular example of a contract of bailment.

Hire

Under a hire agreement, the owner of goods allows someone else (the hirer) to make use of them in return for regular rental payments. The hirer obtains possession of the goods but ownership never passes to him and at the end of the agreement the goods must be returned to the owner. Most people are familiar with hire contracts in the context of TV and video rentals. Consumer hire agreements are covered by the provisions of the Consumer Credit Act 1974. Businesses also take advantage of hire as a method of obtaining the use of equipment which they require. (Hire in this context is usually referred to as ‘leasing’, the owner being known as the ‘lessor’ and the hirer as the ‘lessee’.) The leasing agreement often includes an undertaking by the lessor to service the equipment regularly and effect repairs when necessary. Equipment leasing has allowed businesses to take advantage of the opportunities created by the rapidly changing new technology in the field of information technology. Goods supplied under hire contracts are subject to Part I of the Supply of Goods and Services Act 1982 (as amended by the Sale and Supply of Goods Act 1994 and the Sale and Supply of Goods to Consumers Regulations 2002).