6 March 2020
A daily occurrence for most people and critical for any successful business, a contract is a legally binding agreement between two or more parties that is legally enforceable.
Whether it’s purchasing a chocolate bar from the local supermarket, hiring a plumber or the acquisition of a $12.8 billion aircraft carrier (the Gerald R. Ford), the principals of contract are the same.
Formation
A legally enforceable contract must contain the following key elements:
- An offer (willingness to contract on certain terms)
- Acceptance (corresponding with the offer)
- Consideration
- Certainty of terms
- Intention to create legal relations
The contract does not have to be in writing although in the avoidance of uncertainty and for evidential purposes, this is advised, and it may even be implied from the conduct of the parties involved.
Offer
An offer is an expression of a willingness to contract on certain terms without requiring further negotiation. It follows there must be a willingness otherwise an intention to create legal relations and terms that are clear.
It is distinguished from an invitation to treat i.e. an invitation to negotiate. For instance, products on the shop shelf are generally classified as invitations to treat.
Acceptance
An expression of agreement to the terms of the offer and must be made in response to that offer. It must be properly communicated to be acceptable. An offer not accepted may be rejected either expressly or by a counter offer or even a lapse of time, among others. Equally the party making the offer can usually revoke that offer any time before it is accepted. This is called revocation and like acceptance, it must be communicated.
Consideration
A fundamental requirement in contract law and one that distinguishes enforceable agreements from a gift is consideration. Gifts are not legally enforceable but can be made enforceable by deed.
Consideration need not be adequate, but it must be of some value and the parties can decide what consideration they want. In the classic case of Currie v Misa (1874) LR 10 Ex 153 consideration was summarised as “some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered, or undertaken by the other”
For example, very low rental payments significantly below rental value would amount to good consideration because regardless of adequacy, it involves a benefit of some value and a detriment.
In the context of consideration, if a party has made a bad bargain, the Courts will not intervene.
Intention to Create Legal Relations
In commercial contracts, that is business to business, there is a rebuttable presumption that the parties to the agreement intended the agreement to be legally binding. Otherwise, a contract not made without intention cannot be enforced and the law will generally adopt an objective theory as to whether the parties intended to create legal relations. This is very rarely an issue in commercial arrangements.
Certainty of Terms
Contracts that are incomplete or uncertain generally cannot be enforced although, to give effect to a term, the Court can be asked to make a decision objectively on what the parties had in contemplation at the time of entering in to the agreement.
The law of contract is a very large area of law which often involves complex legal and evidential issues. Except for certain common law and statutory protections, the Courts do not readily interfere with the freedom to contract and as a result, it’s advisable to be cautious when entering in to a contract.
If you require any legal assistance from the Civil Litigation Department at Williamsons Solicitors, please do not hesitate to contact us on 01482 323697.
