Even the smallest businesses will need to deal with contracts and agreements on a day to day basis. But what is a contract, and when will an agreement be legally enforceable? Here we answer some of the key questions you should be aware of.
What is a contract?
A contract is a legally enforceable agreement which gives rise to new rights and duties among those who agree to its terms.
When is a contract formed?
A contract is formed when the following key elements coincide (the key elements):
- Intention to create legal relations.
- Certainty of terms.
Does a contract have to be in writing?
Certain legal agreements do need to be written, possibly even executed as a deed. However, generally speaking, a valid contract does not need to be in writing. A contract may be made partly orally or even implied from the conduct of the parties. Written contracts are preferable from an evidentiary standpoint as the parties may have difficulty in proving what was agreed should there be a dispute.
What should a written contract include?
The basics for any contract will be the who, what, where, when and how of the contract. The parties should also plan for both expected and unexpected termination scenarios, the respective liability of each party and dispute resolution procedures. Other terms may be necessary depending on the nature of the contract.
What is an offer?
An offer is a promise by one party to enter into a contract on certain terms. It must be:
- Capable of acceptance
- Made with the intention of being bound by acceptance
Therefore, an offer must contain the basic terms of the agreement and evidence an intention that no further bargaining is to take place. Further bargaining is likely to be a counter-offer.
What is an invitation to treat?
An offer is different from an invitation to treat, where a party merely invites offers, which can either be accepted or rejected. For example, an advertisement is not an offer; it’s an invitation to treat that does not create a legal contract between the parties.
How is a contract accepted?
Acceptance is final and unqualified assent to an offer. Any variation to the initial offer will not amount to acceptance and will instead form a counter-offer. In almost all cases, a binding contract is formed only if an offer is accepted. The common method of acceptance is signature, but a contract can be accepted by conduct/behaviour.
Can a contract be electronic?
Many forms of transaction are now conducted by various types of electronic communications, such as email and website or app-based trading. In ‘most cases’, electronic signatures can be used as a viable alternative to handwritten ones. Electronic signatures can include typing of a name, selecting an ‘I accept’ button, adding an image of your handwritten signature or using an app to generate a signature.
What is consideration?
Contract law is based on the notion of reciprocity. In common law, a promise is not, as a general rule, binding as a contract unless it is supported by consideration or executed as a deed. Consideration is “something of value” which is given for a promise. Consideration is needed to form a valid contract so a gift for example couldn’t be legally enforceable. The law will also not remedy a bad bargain between commercial parties, for example being paid too little.
Why is an intention to create legal relations important?
A legal contract can only be entered into if the parties intended to create a legal relationship in that respect. Although simple on the face of it, this can be an issue that requires attention. An intention to create legal relations is presumed in commercial situations – for example attending a business meeting to reach a deal. However, where the parties discuss a joint venture over a drink at the pub, enter into a so called ‘gentleman’s agreement’ or the agreement is between family members, the position is less clear.
Why is it important to have certainty of terms?
If you have a clear set of terms and conditions, it is much easier to identify when a breach of contract has occurred. Parties must ensure that all essential terms are provided for in the contract and that the agreement is not vague or ambiguous. A court may not be able to enforce an incomplete or otherwise unclear contract even if it had been the parties intention to enter into it.
Can a contract be unfair?
A contract can be unfair, however a determination of unfairness depends on the nature of the contract. Consumers are quite heavily protected by consumer laws. In the case of ‘business to business’ contracts, there are far fewer statutory protections due to concept of ‘freedom to contract’ and the assumption that both parties hold equal bargaining power. The Unfair Contract Terms Act 1977 (UCTA) does however impose statutory controls on unfair terms in commercial contracts, such as attempts to exclude liability for death or personal injury arising from negligence. Unnegotiated standard terms of business are also subject to further scrutiny in respect of the reasonableness of limitations and/or exclusions to liability.
We can provide advice before you enter into new agreements, and review existing contracts to ensure they are up to date. Contact our business team to discuss your circumstances and the advice we can provide. You can submit an enquiry using the form below, call us on 01392 256854 or email firstname.lastname@example.org.