In English law, a contract can be written, oral or partly written and partly oral. However, it is best practice for a business to ensure that all its commercial contracts are in writing as this will reduce the risks of disagreements arising in future as to whether or not the contract exists at all.
In English law, a contract comes into existence when the following elements are met:
- Offer and acceptance. One party makes an offer of the terms on which the parties will contract on, and that offer is subsequently accepted by the other party.
- There must be consideration, which is that the parties must have exchanged something of value between them. For example, the payment of money in return for goods or services.
- Intention to be legally binding. The parties must intend for the contract to be legally binding. In a commercial setting, there is a presumption under the common law that the parties intend for their contract to be legally binding.
- Certainty of terms. The terms of the contract must be sufficiently certain and detailed. Otherwise, they may not be enforceable.
Offer: In contract law, one party will make an offer of the terms on which the parties will contract on. An offer is a promise by the party making the offer to enter into a contract on certain terms. An offer must be specific, complete, capable of being accepted and must be made with the intention of being bound by acceptance.
Acceptance: For a contract to be binding, the offer must be accepted by the other party; acceptance is the final and unqualified assent to an offer. To be effective, the acceptance must:
- Correspond exactly with the terms of the offer. A party that attempts to accept an offer by making amendments to it is in fact making a counter-offer, which amounts to a rejection of the original offer so that no contract exists. A counter-offer is in fact a new offer made to the party that made the original offer, and that party can then choose to accept the new offer.
- Be communicated to the party that made the offer. Acceptance can also be done through conduct. For example, where a supplier does not communicate acceptance of an order but it delivers the goods and requests payment.
- Comply with any prescribed methods for acceptance as specified in the offer.
Consideration: Contract law is based on the notion of reciprocity, that is, a person cannot enforce a promise unless they have given or promised something in exchange for it. The legal term for that "something" is consideration. An obvious example of an agreement that is not supported by consideration, and therefore unenforceable, is an agreement to make a gift; that is, an agreement to provide a benefit with no act or omission being required of the recipient.
The term "consideration" is perhaps best described as some form of benefit and detriment between the parties:
- Customer agrees to purchase goods from Supplier for £1000.
- Customer provides Supplier with the benefit of being £1000 richer to its own detriment of being £1000 poorer.
- However, Supplier provides a benefit (the goods) to Customer and suffers the detriment of no longer having the goods.
In most commercial contracts, the element of consideration is usually met. The parties must intend for the contract to be legally binding. This is because a contract cannot be made without a mutual intention to create a legally binding arrangement. If no such intention is present, then there is no contract. In a commercial setting, there is an assumption that the parties intend for their agreement to be legally binding.
Certainty of terms: The terms of the contract must be sufficiently certain and detailed to be legally enforceable; if those terms are not materially agreed, there is no binding contract. Parties must ensure that the contract is:
- Complete; that is, not lacking in some essential term.
- Not uncertain, for example drafting that is vague or ambiguous.
If there is disagreement over whether a contract has been formed and the issue is taken to court, the court will consider all the evidence put before it and adopt an "objective test" to determine whether or not the parties intended for a contract to exist.
A well-drafted commercial contract will usually meet the test for effective contract formation, such that there will be no issue as to whether or not there is a legally binding contract.
Key clauses that can be used to deal with risks in a contract include:
- Limitation of liability clauses.
- Indemnity clauses.
- Force majeure clauses.
- Business interruption or disaster recovery clauses.
- Termination clauses.
More recently there has also been greater emphasis on trade compliance clauses in commercial contracts, requiring parties to comply with laws and regulations relating to export controls and sanctions, including the extraterritorial laws and regulations of the United States. These laws and regulations are complex, and contractual parties should fully understand any agreement before entering into it. Those parties should also understand any liability as a result of regulatory and/or contractual non-compliance.
Andrew Skinner is an experienced regulatory trade lawyer (Solicitor) and has worked as an in-house lawyer for a global technology company, as well as in private practice. He is also a professionally qualified engineer and registered with the UK’s Engineering Council as a Chartered Engineer (CEng). Andrew advises clients on a range of trade compliance issues in various sectors, including electronics, aerospace & defence, cosmetics, IT, automotive, nuclear engineering and industrial engineering, delivering timely pragmatic advice in a way that recognises the commercial demands faced by clients.