What makes a contract?

Most people have an implicit understanding of contractual relationships – when a binding agreement has been made, when someone doesn’t perform their side of the bargain, what’s a fair deal and what isn’t. Whether you’re an individual or a business, such understanding underpins your daily activities, potentially leading you into litigation with another. As a litigant, to increase your chances of success, you will want to armor yourself with a deeper understanding of contract law.

English law has made explicit contractual elements – if any of these is lacking, there is no legally binding contract! The elements are: contractual intention, agreement and consideration.

Contractual intention is presumed to exist in business agreements, and presumed not to exist is domestic and social agreements. You can challenge these presumptions by showing evidence to the contrary if you want to establish that no contract existed, or that a contract did exist, as the case may be.

Agreement boils down to offer and acceptance. An offer is a definite promise to contract on and be bound to certain terms. Acceptance is unconditional assent to all the terms of the offer. Acceptance cannot be given if the offer has been terminated, either because it was expressly revoked or because it was rejected or if it has lapsed. An offer cannot be revoked after it has been accepted. Lastly, A conditional acceptance – “I accept, but I’ll only pay £100 instead of £150” – should be understood as rejection of the initial offer and as an independent offer in its own right.

4275674005_d4e4c41a2d_zConsideration must typically have economic value, and is either a benefit to the person receiving it, or a detriment to the person giving it. The law also has it that it need not be adequate, but must be sufficient – it need not be of equal value to the offer, only of nominal value. Past consideration – such as a favour done for someone in the past – is not good consideration, unless it was given as a request from the other party and the parties understood that fulfilling the request would be rewarded in someway.

Now that you have established that a contract exists, you must look to its content. Terms in a contract will either be either conditions, warranties or innominate. Conditions are the most important terms of a contract. Remedies for breach of conditions include termination of contract in addition to damages. Breach of warranties – less important terms – do not give rise to the right of termination, only damages, no matter how serious the loss caused. Innominate terms can function as conditions or as warranties, depending on the consequences of their breach – the courts will make the decision.

In addition, terms can be express or implied. Express terms are terms that were agreed between the parties, whilst implied terms, though not agreed between the parties, are included in the contract by virtue of the law (through statute or the courts). Some of the most common terms implied by statute come from the Sales of Goods Act 1979 and the Supply of Goods and Services Act 1982, for example, that goods sold or supplied are of satisfactory quality and fit for purpose.

I hope this introduction proves useful. Look forward to more focused articles on contract in the near future.

Words: Diogo Gouveia