Contract Law – Forming a Contract

Introduction

Contracts are the foundation of all commercial business relationships. Whether you are entering into a simple agreement or a complex commercial arrangement, it is important to get the basics right.

In this article, we look at the elements required for a contract to be legally enforceable.

Essential elements

A contract is a legally binding agreement between two or more parties (who could be individuals, companies, partnerships, or other legal entities). To be properly formed, a contract must have these essential elements:

1. Offer
2. Acceptance
3. Consideration
4. Intention to create legal relations
5. Certainty of terms.

Offer

An “offer” is a clear and definite promise by one party to enter into a contract on certain terms. It must be specific, complete, capable of acceptance, and made with the intention to be legally bound to if it is accepted.

Importantly, an offer is distinct from an “invitation to treat”, which is merely an invitation to negotiate or make an offer. For example, a general description of goods on a website is typically just an invitation to treat and is different to an offer because the parties do not necessarily have an intention to be legally bound at that particular moment – a customer could, for example, put the goods displayed in their basket, but later decide to delete them and not purchase i.e., no offer was made with an intention to be legally bound.

Acceptance

“Acceptance” is the unqualified acceptance of all the terms of the offer.

Usually, there will be a period of negotiation before all the terms are accepted. During negotiations, it is important to remember that a counteroffer is not acceptance. If the other party proposes alternative terms, this amounts to a rejection of the original terms and instead, a new counteroffer. The original offeror must then decide whether they accept the counteroffer.

Once the parties agree on all the material terms of the offer and unqualified acceptance is given (i.e., no further counteroffers), the accepted terms become the terms of the contract.

Acceptance must be communicated. In certain circumstances, conduct can amount to acceptance, if a party has done a certain act (for example, delivers goods) with the intention of accepting the offer. Silence, however, will not constitute acceptance.

We are seeing an increasing number of cases where more informal methods of acceptance being accepted by the courts as binding the parties, so you must be wary of this. For example, a thumbs up emoji on a WhatsApp message has recently been deemed to be acceptance of terms when two parties were discussing contract terms over the messaging platform.

To avoid any confusion about acceptance of terms during negotiations, you should mark all correspondence as “subject to contract”, so that it is clear that no contract is made until formal acceptance has been given. Where discussing contract terms in more informal settings such as messaging platforms, make sure to clearly communicate whether your responses (including emoji responses) are intended as acceptance of all terms or not.

Consideration

Consideration refers to the value exchanged between the parties for the promises (terms) agreed in the contract. Both parties must receive some value for the contract to be legally enforceable.

Usually, consideration is the monetary value payable under the contract, but it could be any valuable object decided between the parties. Consideration does not necessarily need to be adequate. The parties can agree “nominal” consideration, which is typically the sum of £1 (although this is only likely to be relevant in specific circumstances).

It is important to note that if you are amending an existing contract, new consideration will need to be given for any additional duties in the amendment. Usually this is addressed by additional payment being made for further services agreed under an amendment.

If you are unsure about whether consideration will be given, consider executing the agreement as a Deed which does not require consideration in order to be legally binding.

Intention to create legal relations

Both parties must intend for an agreement to be legally binding. In commercial arrangements, this intention is generally presumed.

If you do not intend for terms to be legally binding (for example, Heads of Terms, or a Letter of Intent) make sure to state that clearly on the document itself.

Written vs Oral Contracts

While oral agreements can be made, they are inherently riskier and more likely to give rise to disputes. Without written documentation, it becomes difficult to prove what terms were agreed, or whether the parties intended to create a legally binding agreement at all.

We strongly recommend that, where you have discussed an arrangement in an informal setting, commit the agreed terms to paper as soon as possible and get a written contract in place to record what was agreed. Having a written contract is much more reliable and will provide both parties with better mutual understanding. Often, the process of setting out an agreement in writing assists the parties in thinking through the practical aspects of a deal and how they ultimately want to arrangement to run. It will also assist the parties should a dispute arise as there will be a clear document setting out each party’s obligations which can be pointed to if one party is not performing such obligations.

Certainty of Terms

The terms of a contract must be precise enough to be enforceable. The more vague and uncertain an agreement is, the more difficult it will be to enforce.

Where contractual terms have been signed, the signing party will generally be bound by those terms, even if they have not read the document. The lesson here is to always read a contract in full before you sign it and take legal advice on its terms.

Any terms which are not immediately visible to the other party will only be included in the contract if they have been brought to the other party’s attention before the contract is signed. Make sure to provide the other party with all necessary information and requirements before entering into the contract. This could include a price list, product instructions, codes of conduct or other internal company policies which you require the other party to comply with.

If any particularly onerous or unusual terms are included in the contract, the party looking to incorporate those terms should bring them to the attention of the other party. Failure to do so risks the onerous term being deemed not to form part of the contract.

Conclusion

Understanding the essential elements of a contract helps ensure that your agreements are legally sound and enforceable. By focusing on clarity, communication, and documentation, you can avoid common pitfalls and build stronger, more reliable business relationships.

Should the unfortunate happen and you enter a dispute with the other party, a clear and precise written contract will assist in resolving that dispute as the Court will look at the terms, interpret what they say, and make a decision. This is much more difficult if there is no contract in place or if it is poorly drafted.

Should you require a contract drafting or are in dispute with another party to a contract, then please get in touch with Hayley Evans or Athene Broad who can guide you through the process.