What makes an agreement into a legally binding contract?

A common misperception is that it is a solicitor who makes an agreement legally binding, perhaps by preparing a document in a particular way, or approving it.

Except for a very few types of agreement, where Parliament has legislated additional requirements, what makes a legal agreement is the existence of three things:

Agreement

First, there must be agreement – an offer made by one side, and acceptance by one or more others.

An offer is an expression of willingness to enter into agreement, subject to conditions or terms. It could be made to a specific person, to a group of people, or to the world at large.

An offer is not an invitation to treat. The distinction is that an invitation to treat is an invitation to make an offer, without with the intention that the person invited should be bound by the terms. An example of an invitation to treat is a display of goods for sale in a self-service shop.

An offer can be withdrawn at any time, provided the withdrawal is communicated to the offeree. It can be communicated by a reliable third party, and not necessarily the offeror.

Acceptance must be unqualified and final.

If a counter-offer is made that aims to change the terms, then the original offer is deemed to be rejected. A rejected offer cannot be restored or accepted unless it is made again.

A request for more information about the offer is not a counter-offer.

Acceptance takes effect when it is communicated to the offeror.

There are rules about communication of the acceptance. If the means of communication is post, then acceptance takes effect when the post is sent. If the means is instantaneous, such as e-mail or text message, then it takes effect at the time of receipt. However, if the offer expressly states how acceptance should be made, it can usually only be made under those terms.

A lack of response cannot be acceptance.

Both offer and acceptance can be made in writing, verbally, or by conduct.

An exchange of economic value

Secondly, contracts under hand must have consideration – something of value exchanged between the parties.

Consideration must be sufficient, but need not be adequate. In other words, the thing given must have economic value, but that value does not have to reflect the value someone else might accept.

To be sufficient, the consideration must detriment the party who pays it, but it does not have to benefit the other party. Alternatively, it can be given to a third party nominated by the one who otherwise would receive it.

Generally, consideration must not be for an action that occurred in the past. For example, money given on a date prior to that of the contract as a gift cannot be consideration.

There are exceptions.

A pre-existing debt can be consideration for a bill of exchange. For example, cheques can be used to pay for work carried out in the past.

If a party is asked to perform an obligation with understanding that the performing party is to be remunerated in the future, then that is sufficient consideration.

Intention to enter into legal relations

Thirdly, the offer and the acceptance must both be made with intention to enter into a legally binding agreement.

In commercial transactions, it is presumed that this intention exists. To claim otherwise is difficult.

Social arrangements, such as those between family members, are presumed not to have intention. It would be incredibly impractical to be bound by every small promise to do something for the family.

Inclusion of the words “subject to contract” or use of a “letter of comfort” usually makes the terms set out unenforceable.

Written and verbal agreements

Under common law, writing an agreement down is not necessary to make it legally binding. An informal agreement, such as one made verbally, will be binding, if it has the three components.

Parliament has made statutory exceptions to this rule. For example, many contracts involving the lease, transfer, options over and sale of land, and those relating to employment, and transfers and licensing of certain types of intellectual property must be written so that each side is aware of his or her obligations and rights. Likewise, contracts of guarantee are also required to be in writing.

The advantage of clear communication is one of the reasons why plain English is now favoured in legal documents over legalese.

Capacity

In order to enter into a contract, none of the parties must be children. Contracts where one or more of the parties lacked mental capacity (whether as a result of disability or alcohol or drug use) can be overturned.

If one of the parties is a company, the contract must be signed by someone with authority to enter into it. Directors usually have such authority, but not in all situations for all types of contract. Authority can be delegated to someone else, such as a senior manager, solicitor or accountant.

If you are the other party, it is essential that you confirm that the person signing has authority.

Seals are not required. They are sometimes still used to make a signature look more legally binding (although appearance of the document is not something that influences the legality of it). However, access to, and use of a seal is often an indicator that the person signing does have authorisation.

Things that are not required to make a contract

Only the conditions above are required. That makes the potential list of what is not required infinitely long. However, it is worth noting the following:

The agreement does not have to be prepared by, or approved by a solicitor. If this were the case, then every time we bought anything from a shop, we would need a solicitor in tow.

A solicitor does not need to witness the signatures to a document. Again, we all make contracts in our personal lives without a solicitor being present – consider when you change energy supplier and enter into a contract with a new supplier.

Complicated paragraph structures and words not used in day to day language. Use of words such as “wherefore” and “hereinafter” possibly impress stature on an agreement, but they don’t make it any more or less binding on the parties.

Serif fonts, capitalised names and thick cream paper used to be used for legal documents. There were good reasons. Using a high quality paper helped preserve the evidence of the agreement in times when documents were usually stored in damp basements. Serif fonts and capitalisation increased readability of the document when printing was less sophisticated and inks could fade or run. But they weren’t necessary then, and still are not. Often they are preferred because they give weight to the importance of the agreement to one party.

Nowadays, most people have access to a home printer that can print photographs to higher standards than professional development labs could twenty years ago. A document can be presented in whatever way the parties prefer.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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