What are the four elements of a legally binding contract?

We’ve all signed a contract in our lives, and as a director or business owner, you’ve probably signed more than your fair share. Contracts are needed in almost every aspect of the day-to-day running of a business, so it’s important you get it right.

A contract is a legally enforceable agreement between two or more parties, giving rise to obligations for the parties to it.   It is a legal framework for the agreement between the parties, which is both certain and enforceable. However, to be legally binding, a contract must include four key elements: an offer, acceptance, consideration, and an intention to create legal relations.

An offer

An offer is a promise by one party to enter into a contract on certain terms. It must be specific, complete, capable of acceptance and made with the intention of being bound by acceptance. An offer must, therefore, contain the basic terms of the agreement with the intention that no further bargaining is to take place.

An offer can be made to an individual, a group or even the whole world (as was the case in Carlill v Carbolic Smoke Ball Co. [1893], where an advertisement in a newspaper stated that £100 would be paid to any person that contracted flu after using a smoke ball three times daily for two weeks).

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 contractually bound. A good example of an invitation to treat is goods that are displayed on a shop shelf. Here, the contract is only formed at the till (when you make the offer to buy the goods and the sales assistant accepts by processing the sale): before then, the goods can be put back on the shelf.

Acceptance

Acceptance is the final and unqualified acceptance of an offer. This means it must be made in response to the initial offer, in correspondence with its terms, without any variation. It is essential that acceptance is communicated to the person making the offer in order to be effective. Acceptance can be made verbally, in writing (including email) or by conduct (meaning the party clearly acted with intent to accept the offer).

Consideration

Contract law is based on the notion of reciprocity. A party cannot enforce a promise made by the other party unless it has given or promised something in exchange for it.  

Contract law is not concerned with the value of the consideration given, and it will not interfere with the bargain between the parties (although the consideration must have some value even if it is not adequate, for example, a peppercorn rent where the payment is a nominal fee such as £1).

Consideration is not needed where the contract is signed as a deed.   

An intention to create legal relations

A contract cannot be made without a mutual intention to create a legally binding arrangement. Where no such intention can be attributed to the parties, there is no contract. However, an intention to create legal relations is presumed in commercial situations.  Where no intention to create a contract can be attributed to the parties, there is no contract. Make it very clear you do not intend to create a legally binding relationship if that is the case.

For help and advice about anything covered by this article, please contact David Wozniak on 0191 211 7831 or email [email protected]