This chapter gives a very brief (and oversimplified!) overview of some of the key commercial law principles that can be relevant when working as a commercial lawyer. It is unlikely that you would be expected to understand any of these principles in great detail during interviews and internships. However, understanding the basic principles could help you to create a good impression with interviewers and with supervisors during internships.

Contracts form a key part of the commercial world. Buyers and sellers bind themselves to transactions through Sale and Purchase Agreements (SPAs). Employees and employers set out their respective duties and responsibilities in employment contracts. Lenders and borrowers set out their rights and obligations in loan agreements. Arrangements discussed later in this course such as licensing, franchising and outsourcing are governed by contracts. Without contracts (and the law governing the enforcement of contracts), the commercial world would have to function solely on trust, which would likely discourage people from transacting with one another. 

Sale And Purchase Agreement (SPA): sale and purchase agreements (or “asset agreements”) are legal contracts that describe the outcome of key commercial and pricing negotiations and when signed, obligate a buyer to buy and a seller to sell. An SPA can be used to purchase either the assets of a company as part of an asset/business sale, or the shares of a company. In the latter case, you might hear the document being referred to as a “share purchase agreement”. 

How is a contract formed?

Contracts can be formed in a number of different ways. Contractual terms are typically set out in a document and signed by the relevant parties. However, contracts can also be created by any number of other means (e.g. through oral agreement and electronic communication) so long as the basic elements required to create a contract exist. The key elements are:

1.Offer

One party must make a clear offer to the other party. The terms of the offer must be certain and the offer should indicate that the offeror (the person making the offer) is genuinely prepared to proceed with the transaction if their offer is accepted.

You probably make “offers” on a daily basis, although you may not realise that this is what you have been doing. For instance, when you go into a shop and approach the cashier with a product that you wish to buy, this constitutes an “offer” to buy that product (assuming that you do not try to negotiate the price).

2. Acceptance

The offer must be unconditionally accepted by the offeree (the party that received the offer) and acceptance must correspond completely with the terms of that offer. “Acceptance” has not occurred for these purposes if the offeree specifies qualifications/conditions to their acceptance or introduces different terms (e.g. a different price, delivery date or quantity). Instead, this would likely constitute a “counter-offer”, which the law dictates will void the original offer. 

Acceptance must be communicated (by words or conduct) and must take place before the offer in question is withdrawn by the offeror or lapses. An offer will lapse if (a) the offeror specifies a time limit during which acceptance must take place and this time limit expires; or (b) if no time limit is specified by the offeror, after a “reasonable” period of time. There are complex rules governing the precise time at which acceptance is deemed to have taken place (timing can depend on the method by which acceptance is communicated, for instance by post or email), but further discussion of this is outside the scope of this course.

3. Consideration

The “consideration” requirement in this context means that something of value must flow from each party to the other. If I promise to give my laptop to a friend for free, that friend has not given any consideration for my promise. My friend therefore cannot sue me for breach of contract if I do not then give him/her the laptop. However, if I promise to give my laptop to a friend in exchange for that friend promising to (for instance) give me money, give me their car or paint my house, then this would satisfy the “consideration” requirement. It does not matter if the goods/services to be exchanged are of different values. 

4. Intention to create a legal relationship 

The parties to a contract must be shown to have had the requisite intention to be legally bound to perform their obligation(s) under the contract. In commercial agreements (e.g. agreements between two businesses or agreements between businesses and customers), the presumption is that where (a) an offer is made; (b) acceptance has occurred; and (c) consideration exists, the parties intend to be legally bound. 

In contrast, in social arrangements (e.g. where a husband promises to clean the kitchen in exchange for his wife doing the shopping), the presumption is that neither party intends to create a legally binding agreement and thus no intention to create legal relations exists.

Example

To place this in context, let’s use the example of buying a chocolate bar in a supermarket. There is no signed document setting out a contract, however a contract is formed once the purchase is complete. 

Offer: a valid offer is made if you offer to buy a chocolate bar in a supermarket at the price advertised. 

Acceptance: acceptance has occurred once the cashier scans the product and accepts your money. 

Consideration: the “consideration” requirement is satisfied as you are paying (or promising to pay) money, whilst the supermarket is promising to transfer ownership of the chocolate bar to you. 

Intention: the presumption is that you and the supermarket intended to enter into a legally binding contract, as the transaction is taking place in a commercial context (although you may not be explicitly thinking this at the time!).

Implied Terms

Even if these terms are not expressly set out in the contract (which may very well be the case if the contract is agreed orally), the law will “imply” certain terms into the contract. “Imply” for these purposes means that the contract “is to be treated as including” certain terms (even if it does not expressly do so). Examples of such implied terms are set out below.

1. The product must conform with its description

If the packaging describes a certain product, then there is an implied contractual term that the contents of the packaging will contain that product. If this is not the case (e.g. a bottle labelled “shampoo” actually turns out to contain toothpaste) then the supplier has breached this “implied” contractual term.

2. The product is of satisfactory quality

The meaning of “satisfactory” will depend, for instance, on the description applied to the product (e.g. “luxury”, “basic”, “shatterproof”) and the price paid for that product (you would generally expect more expensive products to be of a higher quality). The goods must essentially be free from defects and fit for the purpose for which products of that description are commonly supplied. For instance, there is an implied contractual term that a chocolate bar should be edible; a new computer should have a reasonable battery life, run at a reasonable speed and work with the internet; a table should not spontaneously collapse etc.

Express Terms

Parties can (and often do in more complex commercial transactions) negotiate more precise terms and expressly include these in the contract. Parties may specify particular payment methods, delivery dates or alterations to products (e.g. upgrading a computer hard drive or shortening the sleeves of a shirt) in the contract. 

Parties may also specify a special purpose that the product must serve. For instance, if a party purchases a swimming pool primarily for the purpose of diving off of a 10 metre high diving board, that party can specify that the pool must be 5 metres deep or “sufficiently deep to dive into head-first off of a 10 metre diving board”. Such terms would not necessarily be implied by law, as the law will generally only imply that products are fit for the purposes for which they are commonly supplied (and swimming pools are commonly supplied for swimming, not diving into off of 10 metre high diving boards). 

Breach of contract

Here is a simplified summary of the law relating to breach of contract: if Party A breaches a contract with Party B, Party A must typically pay sufficient damages (compensation) to Party B to place Party B in the position he/she would have been in had Party A not breached the contract. This will usually involve Party A giving Party B a refund (or a replacement product) plus additional compensation for any costs incurred by Party B in relation to the transaction (e.g. the cost of having the product delivered). 

Commercial considerations

It is worth remembering that the commercial world is not governed solely by contracts. There are other commercial factors that may influence how parties transact together or how a party chooses to act when another party breaches a contract. For instance, a manufacturer may provide a refund for a product that a retailer or consumer is unhappy with (even if that manufacturer has not breached any contractual terms) in order to maintain a good commercial relationship with that retailer/consumer and/or maintain a reputation for good customer service.