Contract Law - Formation

Do you know in English law there is no formal definition of what constitutes a contract? It could best be described as a legally binding agreement between at least two parties.  

There are five elements which must be satisfied for there to be a legally binding contract.

1.   Offer.

2.   Acceptance.

3.   Consideration.

4.   Intention to create legal relations.

5.   Capacity.

Offer

An offer is a promise or a commitment that is made by an ‘offeror’ (the person making the offer) in which the terms are communicated to the ‘offeree’ (the person to who the offer is made). It follows that an offer is a promise to do, or not do something, that is capable of acceptance. In contract law, the terms of an offer must be certain and there must be an intention by the offeror to be legally bound.

Example: I offered to sell my Sewell Law branded Stanley Cup to you and said ‘’I will sell you my cup for £45’’ – the terms here are certain and there is an intention to be bound. However, if I instead said ‘’I am thinking about selling my cup, however I would only consider accepting £50 as the bare minimum’’ – this is uncertain and wouldn’t constitute an offer because it is not clear whether the offeror intends to be legally bound and the terms are not certain.

In contract law, the above example is likely to be considered an ‘invitation to treat’. You will come across these throughout your everyday life and may not have realised. For instance, whenever you enter a supermarket and see goods displayed on the shelves with a price label, this is an invitation to treat.

It is in fact the customer who makes the offer to buy the goods when they present the goods to the sales assistant. Without saying a word, the conduct of the customer presenting the sales assistant with an amount of money equivalent to the sale price, is an offer. Of course, the sales assistant is not forced to accept that offer. The supermarket could decline the offer or even make a counter offer. Imagine that!

When an offer is made there a multiple different options which could follow:

1.   The offer is accepted.

2.   The offer is rejected.

3.   The offer expires.

4.   The offer is withdrawn.

5.   A counter offer is made.

Acceptance

Acceptance is a final and unqualified expression of agreement to the terms of an offer. However, offeree’s acceptance must:

1.   Be accepting an offer that remains open.

2.   Be accepting the terms of the offer.

3.   Be unequivocally accepting the offer.

4.   Be unconditional.

5.   Be accepted by someone with the power to accept (capacity).

6.   Comply with the conditions of acceptance in the offer.

7.   Be communicated to the offeror.

Although it is generally the case for acceptance to be communicated to the offeror, there are situations in which a parties conduct will amount to acceptance of the offer.

Example: if you are the owner of a restaurant and place an order with your regular supplier but you don’t receive communication that the supplier has accepted this order. If the supplier proceeds to deliver the goods that you ordered, and requests payment for the same, this conduct (delivering the goods) will be deemed to be acceptance of the offer.

Consideration

Consideration is value that is passed from one party to the other in order for an agreement to become legally binding. In simpler terms, it’s the exchange of something for something else. The legal term for ‘something’ is consideration. That something in everyday life is usually the transfer of money in exchange of a good or service.

It is an established principle that consideration does not need to be adequate, however it must be sufficient. The Courts have even gone as far as deeming £1 to be classed as ‘good’ consideration in case law. Consideration does not have to be a promise to pay money, it could be a promise to do or not do something. Consideration does not have to be monetary either. It must be something of value in the eyes of the law.

Past consideration is not good consideration. What does this mean?

In the old case of Stilk v Myrick 1809, when two of the crew on a voyage from London to the Baltics abandoned the ship, the captain had offered the remaining crew an equally divided share of the deserted crew’s salary if they returned the ship to London. The remaining crew returned the ship to London, however no additional payment was forthcoming, and the matter was brought before the Court. The Court rejected this claim on the basis that the crew members had provided no new consideration for doing what they were already contracted to do by their contract. Their consideration was in the past.  

Intention to create legal relations

A contract cannot be made unless there is a mutual intention to create a legal binding agreement.  

In commercial contracts, it is presumed that the parties intended to create legal relations. If there is a dispute over whether a contract was formed, it is for the party alleging that there was no intention to create legal relations, to prove it.

Capacity

A pre-condition to any legally binding agreement, to form a contract a party must have the legal capacity to do so. The categories of parties who do not have legal capacity include:

1.   Individuals with a mental disability, in which they are legally deemed to lack capacity.

2.   Bankrupts.

3.   Children (under the age of 18) unless certain limited circumstances apply.

4.   Dissolved companies or companies that have yet to be incorporated.