An agreement must have four essential elements to give rise to a contract and its respective obligations: offer, acceptance, consideration and an intention to create legal relations. When you buy a newspaper, clearly these all exist in an instant; alternatively, for a large scale transaction there may be a lengthy negotiation resulting in an end contract.
Offer
An offer is a promise to enter into a contract on certain terms. It must be specific, complete, capable of acceptance, and intended to be bound by acceptance. It can be express or implied by conduct. It can be made to an individual or a group or persons. It can even be made to the world (such as in the famous case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, where an advertisement in the Pall Mall Gazette was held to be an offer).
The key is that the offer cannot be an invitation to treat, being an invitation for persons to make offers, such as the display of goods in a shop, in product catalogues or at auctions.
Offers may be terminated prior to acceptance: by lapse, withdrawal, rejection, death of the offeror, or failure of a condition precedent.
Acceptance
An offer must be accepted to create a contract. It must be final and unqualified with no variation to the proposed terms. It must be communicated by the accepting party to the offeror or, in some cases, conduct will constitute acceptance (for example, where goods are delivered and payment taken).
Where an offeree purports to accept an offer but raises new terms, this is not acceptance, but a counter-offer. This is effectively a rejection of the original offer (meaning no contract exists) and the making of a new offer which, if accepted, will form the contractual terms.
In business, particularly supply agreements where both supplier and buyer have their own standard terms, this can lead to the “battle of the forms”. For example, if the supplier provides its standard terms but the buyer raises a purchase order stating its own terms will apply, if the supplier then delivers goods (i.e. its conduct is acceptance of the counter-offer), the buyer’s terms may well apply instead. Often, the last set of terms despatched will be the terms which apply.
Consideration
Consideration essentially means that a person cannot enforce a promise unless he has given or promised something in return. A contract without consideration will only be enforceable if made by deed.
A court will not look behind the value of consideration even if it is inadequate (i.e. a peppercorn rent). However, it must move from the promisee and not a third party. A third party cannot enforce a contract, unless the contract falls within the Contracts (Rights of Third Parties) Act 1999 which permits this where the contract expressly states that the party may do so or where the contract purports to give a benefit on him.
Consideration must not be historic, i.e. performance of a pre-existing obligation cannot be good consideration, unless the party does more than what was originally contracted. However, where the performance of a pre-existing duty provides a practical commercial benefit to the promisor, such as a saving of time or inconvenience in securing replacement performance, it can be valid consideration (although this principle has been judicially criticised).
Performance of (or the promise to perform) an existing contractual duty owed to a third party is good consideration. For example, where a party is contractually bound to deliver goods to A but is ordered to deliver to B instead, that delivery (an existing contractual duty to A) would be consideration to enforce B’s promise to unload the goods in return (Scotson v Pegg (1861) 3 L.T. 753).
Intention to create legal relations
The parties must intend to create a legally binding agreement, else there is no contract. This is presumed in commercial dealings but rebuttable with clear evidence to the contrary such as express wording not to be bound. The phrase “subject to contract” can assist with this but is not conclusive.
Heads of terms, a letter of intent or a memorandum of understanding are often preliminary documents used to prevent such an intention arising, although morally they may have binding effect.
Capacity
In addition to the four elements above, contracting parties must have the capacity to be bound. For example, where a party is aware that the other is of unsound mind or drunk so that he is incapable of understanding the nature of the transaction, the contract will be voidable at the option of the other person. There are also special rules for minors.
Formalities
Finally, it is important to remember that although many contracts can be oral, others have certain formalities: for example, contracts for the sale of land and most share transfers must be in writing; transfers of land, leases and powers of attorney must be by deed. An intention to be bound may be shown by signing a contract, but signature is not an essential requirement.
Whether you are putting together a set of terms and conditions, a contract to document a specific transaction or relationship, Fortune Law has the necessary expertise to advise and assist you with all aspects of Contract Law. Please get in touch by telephone on 020 7440 2540 or by e-mail atenquiries@fortunelaw.com.
