Contract Law: Elements of a Binding Law Contract

This guide contains a list of components that form a valid contract – and what they mean.

Defining ‘contract’

A law contract is a legally binding agreement between two or more parties with the capacity to agree. For a contract to be valid, it must meet four key essentials: offer, acceptance, consideration, and the intent to create legal relations.

Contracts are fundamental to all commercial activities, from buying or selling products and services to using software or renting property. Understanding how law contracts work is crucial, as they outline the terms that define the rights and responsibilities of each party, forming the contractual obligations that must be adhered to. Even terms not explicitly mentioned (implied terms) may still apply within a law contract.

The law of contract is extremely old, and legislation around contracts (like the Unfair Contract Terms Act 1977) has been brought in to regulate concepts developed by lawyers.

Does a contract have to be written?

In general, there is no requirement that a contract must be in writing. However, a written contract can provide a clear, tangible record of the terms agreed upon by the parties, ensuring that all contractual obligations are explicitly outlined.

Contracts can be made in various ways, including:

• in writing (either in a formal document or in correspondence);
• orally; or as a verbal contract
• by conduct or acts of the parties.

Most commercial contracts are in writing to maintain a proper record of the agreement, however they do not have to be.

Written contracts do not need to be signed. Drafts of formal contracts are not usually sufficient to be binding. Unwritten contracts do not require any formalities.

What elements form a valid contract?

There are five elements which, taken together, make a contract valid:

• offer;
• acceptance;
• consideration;
• capacity; and
• intention to create legal relations.

1. Offer

An offer is a promise to enter into a contract on certain terms, where one party promises to do something in exchange for another party’s performance.

The offer requires some act that gives another person to create a contractual relationship between the parties. Then the other party has the power of acceptance.

An offer must be specific, complete, capable of acceptance and intention to bound.

Also note that offers can be withdrawn before acceptance, by lapse, withdrawal, death of the offeror or failure of a condition or precedent.

2. Acceptance

Acceptance of an offer forms the ‘agreement’ – the contract – between the parties. Failure to adhere to the terms agreed upon can lead to legal consequences, including a breach of contract.

The following requirements are needed for acceptance to be valid:

• The offer must remain open

This means that acceptance of the offer must happen whilst the offer is still open for acceptance.

One cannot accept an offer that is no longer open.

• Mirror the offer

One cannot accept an offer which is different to the original offer made.

For example, if an offer was made and the offeree varied the terms, they could not then accept the original offer. This is because the original offer has become a counter-offer.

Acceptance must mirror the exact terms of the original offer.

• Be unequivocal

This means that there cannot be doubt that the offer has been accepted.

• Be unconditional

The acceptance cannot be subject to a further condition being satisfied.

• Must be communicated to the offeror

The offeror must know that their offer has been accepted. Usually, acceptance is made known by words or writing.

Or, acceptance could be made known by conduct of the parties.

Other communications – voice, letter, email, SMS message or text message – are all valid forms of acceptance.

Note that silence is very rarely accepted as acceptance. In order for silence to be considered acceptance, there are usually previous dealings which demonstrate that it is usual for both parties to treat silence as acceptance. Alternatively, silence may be deemed as acceptance if both parties have agreed that is possible.

• Comply with the conditions of acceptance in the offer

An offer can be accepted through any way of acceptance, such as vocally, written or by conduct. It does not have to be communicated in a certain way unless stated so in the offer.

For example, if an offer says acceptance must be communicated by email, email will be the only sufficient mode of acceptance.

Other points to note:

An invitation to treat is not an offer, meaning they cannot be accepted. A definite offer capable of acceptance has not been made. An example of an invitation to treat is an advert in a shop window.

3. Consideration

Consideration is another component of a contract. Consideration is a form of payment or other benefit, and both parties must give consideration to form a legally binding contract.

The only way a contract without consideration will be an enforceable contract is if it is made by deed – which is a written document executed with the necessary formality.

Examples of consideration include in a B2B relationship, where one business supplies goods or services in exchange for money.

Key points about consideration:

4. Intention to create legal relations

The parties must intend to create a legally binding agreement, or there is no contract – also known as ‘contractual intention’.

In a commercial context, the court will usually assume there was an intention to create legal relations. The burden is on the party claiming that a binding contract has been made to prove the intention to create legal relations. Equally, however, where there is any express agreement the burden of proving that there is no contractual intention is a heavy one.

5. Capacity

Contracting parties must also have the capacity to be bound. Examples include; companies, LLPs and individuals of at least 18 years old.

Contracting parties must also be to fully comprehend at the time of their agreement what their obligations will be.

There are certain persons that lack the capacity to enter into a contract, with the consequence that resulting contracts will not be enforceable against them.

Examples of those who do not have capacity to contract:

• Intoxicated people

Intoxicated people lack the capacity to enter into a contract because they cannot fully understand the obligations that they are undertaking.

For example, if a party is aware that the other is mentally incapacitated, even temporarily, so that they are incapable of understanding the nature of the transaction, the contract will be voidable at the option of the other person.

• Minors

There are also special rules for minors – those under 18. They lack contractual capacity, with the exception to this rule being if the contract is in regard to a necessity, such as food, clothing or shelter. In these cases, under 18s are able to contract.

• Mentally disabled

If the person doesn’t have the mental capacity to understand the meaning and effect of the contract, they lack the capacity to enter a contract.

Mentally disabled people can void most contracts or have their guardian void it for them.

• Other

This does not include individuals who fail to understand the document for no legitimate reason. For example, someone cannot claim they did not have the capacity to sign a contract simply because they did not understand a word used in the document,

Illegal and void contracts

The law will not enforce all contracts.

A contract that involves illegal conduct may be void and unenforceable.

Contracts prohibited by statute will be deemed to be void, whether the parties know the legality or not.

However, where one party performs a legal contract in an illegal manner, the other party may still enforce the contract or recover damages for breaching it.

Freedom of contract

Autonomy is crucial. Businesses are free to agree on terms they choose, allocating risks within their contracts as they wish.

It is up to the parties to decide what risks they will accept and on what terms. Courts will respect their decision and enforce the deals that they sign up to.

Quick Summary

FAQs

What are four types of mistakes that can invalidate a contract?

Mutual Mistake: Both parties share the same incorrect assumption about a vital fact.
Unilateral Mistake: One party is mistaken about a fundamental aspect of the contract, and the other party knew or should have known about the mistake.
Common Mistake: Both parties make the same error regarding a fundamental fact.
Mistake of Law: Both parties are unaware or mistaken about any legal principles affecting the contract.

What is an example of a breach of contract?

A breach of contract occurs when one party fails to fulfil their obligations under the contract terms. An example could be a contractor agreeing to complete a home renovation by a certain date but failing to do so, leaving the project incomplete or significantly delayed. This failure to perform as agreed can lead to legal consequences and the injured party may seek remedies such as damages.

Creating your next contract

A contract is not just a signed document, there are components required to create a valid one.

If you need help drafting a contract for a commercial arrangement, contact us here. Our expert lawyers can help.

Further Reading