In today’s fast-paced commercial world, it can be easy for businesses and their personnel to lose sight of the rules which govern the creation of a binding contract when negotiating a commercial deal.
Getting it right is important however, as formation problems can raise questions as to the terms, enforceability and even the very existence of a contract.
A legally binding contract arises when five key elements coincide, namely:
It is important for the parties to negotiations keep these elements in mind in the course of negotiations, so as to avoid inadvertently creating a binding contract that does not reflect the parties’ intentions, or perhaps failing to a create a valid contract entirely.
Notably (and save for some limited exceptions), contracts do not have to take any particular form to be binding – contracts can be made orally, though it is preferable to record the agreed terms in writing.
Offers should be specific, complete, capable of acceptance and made with the intention of being bound by acceptance. Mere invitations to treat (such as the display of goods for sale in shops) do not comprise an offer.
A binding contract only arises once an offer has been accepted by way of a final and unqualified assent to the offer. Marking correspondence ‘subject to contract’ indicates that such correspondence is not intended constitute acceptance, and protects against inadvertently creating a binding agreement.
A promisee cannot enforce a promise unless the promisee has been given or promised something (i.e. consideration) in exchange for it.
Consideration does not need to be adequate (nominal consideration of £1 is for example sufficient to create a binding contract) but there must be some value. An exception to this rule is where contracts are executed as a deed – such agreements entail additional formalities over and above the creation of a simple contract.
Intention to create legal relations
A contract cannot be made without a mutual intention to create a legally binding arrangement. Notably, a rebuttable presumption that the parties intend to create legally binding relations applies to commercial arrangements.
Certainty of Terms
The parties should ensure that their agreement is complete, and not lacking in an essential term. Further, the agreement should not be vague or ambiguous. The courts are reluctant to enforce such contracts, notwithstanding that there may have been a genuine intention to create legal relations between the parties.
Parties to commercial negotiations should procure legal advice at an early stage, to avoid the pitfalls that may arise with regard to contract formation, and to ensure that the final agreement reflects their commercial objectives.
For assistance in this area, please contact out business team:
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