Contract formation
A legally binding contract is created where:
- An offer has been accepted.
- The parties reach agreement on all the contractual terms which they regard, or the law requires, as essential.
- The parties intend to create legal relations.
- There is consideration.
The contract is created at the moment the parties reach agreement on all essential terms. It is clear that “unless all the material terms of a contract are agreed, there is no binding obligation” (Maugham LJ in Foley v Classique Coaches Ltd [1934] 2 KB 1).
In determining whether the parties have reached agreement on all essential terms, the governing criterion is whether an honest and reasonable businessman would have concluded from the parties’ communications and conduct that they had agreed all the terms they considered to be a precondition to creating legal relations.
Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that the parties did not intend agreement of such terms to be a precondition to a legally binding agreement.
In one of the leading cases on contract formation, RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Company KG (UK Production) [2010] UKSC 14, the High Court, the Court of Appeal and the Supreme Court all reached different conclusions on whether a contract had been entered into, demonstrating that formation cases nearly always turn on questions of fact and as such are exceptionally dependent on the particular court.
Implied terms
A Court may imply a term into a specific contract to fill a gap, particularly a gap in the contract’s drafting. The rationale for implying a term in this way is to reflect the parties’ intentions when the contract was entered into. However, an implied term may be of little assistance if an agreement lacks certainty. Implied terms are often general in concept, and may not assist the court in determining key performance criteria if these have not been set out expressly in the agreement.
Nature of contracts
Contracts are more easily enforced if they are unambiguous, clear and carefully expressed in writing. A contract is an agreement giving rise to obligations which are recognised or enforceable by law.
All manner of agreements may give rise to a contract: the agreement does not have to be in writing. In order to protect your position and reduce the likelihood of disputes you ought to make sure that the terms of any agreement that you are proposing to enter into is in writing and prepared by experienced solicitors.
Things are said and written during contract negotiations and it is often difficult to establish the point at which the parties have reached a binding agreement and the exact terms of that agreement. Lawyers must resort to basic contract law principles to establish the legal position with certainty.
Contract drafting and breach of contract claims
Solicitors at Humphreys & Co. are experienced in contract drafting & interpretation, and in claims for breach of contract.
If you are a business or an individual and require advice on the meaning and effect of the terms of any contract to which you are a party, or into which you intend to enter, our lawyers can advise you. If you are not a party to a contract you may, in certain circumstances, still have rights under it and our solicitors can advise you on whether this is so.
We aim to provide clear, up-front information about our charges so that there are no unexpected surprises.
We act for clients internationally and can prepare contracts with a multi-national dimension as easily as purely domestic contracts.
Why should I seek specialist legal advice?
Whatever the nature of the agreement which you intend to enter into, you should seek legal advice so that your agreement:
- is in writing, and therefore easy to prove if this becomes necessary;
- is in clear, unequivocal terms, so that instances of dispute can be avoided or more easily resolved;
- is enforceable – our solicitors are aware of the pitfalls that could render a poorly-drafted contract unenforceable which, depending on the value of the contract, could potentially result in the loss of millions of pounds to your business;
- provides for the unexpected – our solicitors can ensure that your contract is skilfully drafted to ensure that when the unexpected occurs, you are not left out-of-pocket;
- protects your position by having been properly negotiated and drafted in terms favourable to you.
Contract formation: reminder
The law on formation of contract can be encapsulated in a number of basic propositions:
- The test of whether an offer has been accepted is an objective test, namely whether the words or conduct are such as to induce a reasonable person to believe that the person intends to be bound.
- As a general rule an offeree who does nothing in relation to an offer is not bound by its terms.
- If the offeree has solicited the offer, the agreement that he should not be put to the trouble of rejecting the offer when it is made loses much of its sting.
- If there is a course of dealing between the parties, the offeror may be led to suppose that silence amounts to acceptance.
- Acceptance can be given by conduct. Where this amounts to a positive act it may well be clear that acceptance has been given, although no words of acceptance have actually been spoken.
Hayes & Others -v- Gallant [2008]
