Contracts, and the laws that govern them, are fundamental to the operation of businesses and are required whenever a business purchases or sells its goods and/or services. As such, businesses and their personnel should be aware of and understand the formation of contracts and their key elements.
To avoid common formation problems (and any consequent potential liability) there are significant questions and issues businesses should consider, for example, whether a binding contract actually exists and, if so, what terms have been incorporated into the contract. This introduction to the formation of contracts, although not a comprehensive overview of contract law, seeks to summarise the fundamental elements of a contract which a business should consider when contracting with other entities.
Offer
- An offer is a promise by one party to enter into a contract with another party.
- An offer must be (a) specific (i.e. unambiguous/unequivocal); (b) complete; (c) capable of acceptance; and (d) made with intention of being bound by acceptance.
- An invitation to treat (e.g. a shop display) is not an offer. If you are not dealing on your own standard terms, it may be beneficial to send an invitation to treat and wait for the other party to return with an offer. This then gives you the discretion and flexibility in accepting or rejecting that offer.
- TOP TIP! Send out all correspondence marked “subject to contract”, unless you do in fact intend to be bound by the correspondence. This clarifies that communications are invitations to treat and avoids you potentially being bound to the other party inadvertently.
- Check that your standard terms are included in your contracting procedures and ensure your sales staff are adequately trained and familiar with such procedures to avoid inadvertently entering into contracts.
Acceptance
- Acceptance is a final and unqualified assent to an offer.
- It must be communicated to the offer or to be effective, although conduct can sometimes constitute acceptance.
- TOP TIP!Contracts can be made by email/orally. Use informal communications with caution and head all emails with “subject to contract”. A failure to do so runs the risk of forming a contract without appropriate protection.
- Beware: Battle of the forms. Consider at what point the contract is formed and which party’s terms will apply. If a party offers to contract on its own terms, which the other party accepts but then imposes its own terms, there is no acceptance but rather a counter-offer. Each party wants to ensure its terms are the last set of terms despatched prior to performance, at which point the contract between the parties is formed.
- Remember that acceptance is the final step before the contract is formed and becomes binding, unless the other party agrees to vary the terms of the contract at a later date.
Consideration
- A promise cannot be enforced unless something (i.e. consideration) has been given or promised in exchange for it.
- Consideration does not need to be adequate, but must have some value.
- Consideration is not required if the agreement is executed as a deed. A deed is a written document which is executed with additional formalities and by which an obligation binding on some person is created or confirmed.
- Past consideration is no consideration, i.e. if a party performs a pre-existing obligation, it does not constitute consideration for a new obligation.
- TOP TIP! If you are unsure about the existence of consideration, either (a) acknowledge in an agreement the existence of some consideration (e.g. £1) or (b) execute the agreement as a deed (see above).
Intention
- A contract cannot be made unless the parties have a mutual intention to create a legally binding agreement.
- An intention to create legal relations is presumed in commercial situations.
- TOP TIP! Be clear whether the agreement is intended to be binding or not.
Certainty
- The agreement must be complete and not lacking in an essential term which constitutes the fundamental purpose of the agreement.
- The agreement must not be uncertain, for example vague or ambiguous.
- TOP TIP! In some circumstances, the court may be able to ‘fill the gaps’ in accordance with the parties’ intentions at the time.
