This article has been written by Matt Sutton, Director at Greenaway Scott.
When most people hear the word ‘contract’ they picture a long daunting document in very small print with a space at the end to sign on a dotted line.
Most contracts, however, do not actually look like this, and are not necessarily written on paper at all. It is easy to forget that a legal contract exists even when we do something as routine as buying a bar of chocolate in the local shop.
Contracts can be verbal, written on paper, formed via email, or even through the actions of the parties, and it can be easy therefore, particularly in this increasingly digitalised world, to enter into a legally binding contract without even realising. With this in mind, it is important to remember that while contracts can take a variety of forms, they all share four essential elements. These are offer, acceptance, consideration, and an intention to create legal relations.
It is helpful for everybody to have an understanding of each of these components of a contract in order to avoid entering into a contract without realising, or conversely relying on a contract that was never even formed in the first place. We will consider each of these elements in turn.
An offer is a promise made by a party to enter into a contract on certain specific terms. While this may seem simple at first glance, it is important to realise that an advertisement of goods and services does not always amount to an offer.
When many businesses publicise the goods and services available to customers, they are not in fact making a legal offer, but are inviting customers to negotiate. It is the customer who makes the legal offer, when placing an order for example. For the avoidance of doubt, the supplier’s terms and conditions will often explicitly state that this is the case.
‘Consideration’ is the legal term for the ‘thing’ that is being given by one party in exchange for the goods and services that they receive. In most cases this will be money.
In order for a contract to be formed there must a mutual intention to create a legally binding arrangement. In commercial situations, however, an intention to create legal relations is presumed.
An acceptance is final and unconditional acceptance of an offer. In order for the contract to be enforceable the contract must correspond exactly with the terms of the offer with no variation. This is where uncertainty often arises, and one of the most common situations where confusion arises is when a contract is being negotiated by email. For example, if Party A makes an offer to Party B, and Party B responds with a variation on that offer, this amounts to a new offer, and Party A must be mindful that acceptance of this offer forms a contract on the new amended terms and not the original terms.
In conclusion, I recommend that everybody should be mindful of these four principles of a contract as they each one can mean the difference between a done deal, no deal, or a deal done by mistake.