A contract is a legally binding agreement setting out the rights and obligations of the parties involved.
The word “contract” is often misunderstood as it suggests a formal written document. However, according to the law a contract can be made in writing, orally or by conduct.
Although verbal contracts are enforceable, it is always prudent to have a written document setting out the terms which can then be used as evidence if there is a disagreement later. The Legal Stop offers a wide range of downloadable contract templates and fixed fee bespoke documents drafting, please visit our website for all your legal needs.
A contract is made only when four criteria are satisfied. They are:
- Consideration, and
- An intention to create legal relations
An offer is a promise by one party to enter into a contract on certain terms. It must be specific, unambiguous and capable of acceptance and made with the intention of being accepted. An offer can be made to an individual, a group of persons or even to the world at large and may be spoken, written or implied by conduct.
An offer must be distinguished from an “invitation to treat”, which merely invites the other party to make an offer and does not carry the intention of being bound. An example of an invitation to treat is a display of goods in a shop. The offer to buy is therefore made by the customer and the shop is free to decide whether or not to accept the offer.
An offer can be cancelled at any time before it is accepted by the other party. If the other party decides not to accept the offer, then they cannot change their mind and accept it as the offer is regarded as having been terminated.
Acceptance must be made in response to the offer and must correspond with the terms of the offer and it must be communicated to the other party to the contract. An offer can be accepted by a communication to the person making the offer or by conduct. Acceptance by communication can include any clear indication to accept the offer as long as this is communicated to the person making the offer. It is therefore established law that acceptance can occur by clicking ‘I accept’ on a website or even sending an e-mail.
Sometimes, rather than accept an offer, a party may decide to make a counter-offer. This will amount to a rejection of the original offer so no contract is made. It will amount to a new offer and the person who made the original offer can then choose whether or not to accept it. Where a counter-offer is accepted then those terms rather than the original terms proposed will be the terms of the contract. If this occurs it is often termed “the battle of the forms” and it will often be difficult for the court to determine which set of conditions prevail.
The general rule is that an acceptance is not effective until it is communicated to the other party who made the offer. There are two rules on acceptance:
- The reception rule: it covers situations which involve instant communications such as telephone conversations, face to face negotiations, etc.
- The postal rule: as a general rule an acceptance must be brought to the attention of the person who made the offer. However, communication through the post is an exception to this rule. The postal rule is that acceptance is deemed to be effective at the time of sending. This is the position even if the letter is lost or delayed in the post provided of course it was correctly addressed. However, it is always advisable to obtain proof of posting to reduce the risk of disagreement at a later date.
The difficulty in relation to contracts formed via a website in relation to electronic communications is regarding whether or not the postal rule applies. Please note that the Electronic Commerce Regulations 2002 require suppliers to clearly state how an electronic transaction governed by the regulations is to be completed. If an offer does not specify the method of acceptance then it can be done by any way chosen.
If a contract lacks consideration then it can only be enforced if it is made by deed. To be considered “good consideration” it must have some value even if, in the context of the agreement, it is only a nominal amount.
As a general rule, past consideration is no consideration. If a party is merely discharging a pre-existing obligation then there is no consideration for it. An example is where A is owed £20 by B and agrees to accept £10 instead. A is not precluded from later asking B for the balance of £10 as there was no consideration for accepting a lower sum because B was already under an obligation to pay the original amount.
Intention to create legal relations
The final point required in order to make a valid contract is to show that the parties intended to create a contract. In commercial transactions there is a rebuttable presumption that the parties intend their agreement to be legally binding. Common ways of rebutting this presumption are by the parties writing comfort letters, letters of intent or by using the words “subject to contract”.
Letters of comfort are used in loan finance transactions. They are issued by third parties and are often given to banks in relation to loans and are letters which provide encouragement or comfort to the lender to proceed with the loan.
Letters of intent are frequently used when negotiating mergers and acquisitions. The main purpose is to record a non-binding outline of the terms that the two parties have agreed.
The use of the phrase “subject to contract” is also used to rebut the presumption of contractual intent. It means the parties have not yet reached an agreement and are still negotiating.
Provided the elements of offer, acceptance, consideration and intention to enter into legal relations are present then a contract will have been formed. Thus, an oral agreement which satisfies these conditions will amount to a binding contract and each party will then be able to rely on those terms, and if necessary can take appropriate action to enforce these.
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