Contract or no Contract .......?

In our daily lives, we form numerous contracts - some within our routine, some completely unbeknown to us. In reality we don’t pay much attention until things go wrong.

It could be as simple as purchasing a ticket for a train journey, purchasing a product online or as complicated as signing a multi-million business deal. No matter what the transaction is, one has to create a contract which is binding – if not, you will have no recourse to legal remedies if things fall apart.

It is absolutely paramount that we pay attention to the fundamentals of a contract, if not, a contract will be invalid and you may face adverse ramifications.

Within English and Welsh legal jurisdictions, there are four fundamentals for the contract to be valid. They are - An offer, An acceptance, Consideration and Intention to create a legal relationship

Offer - For a contract to be legally binding, goods or services or both has to be offered by a party. The party offering must have the intention to offer. This could be to a single person, multiple persons or universally.

An offer is made expressly or implicitly by conduct. However an invitation to treat does not amount to an offer i.e. a product on display. In such instances, a contract will be made only after money and goods are exchanged between parties.

Acceptance –An acceptance must follow an offer for the contract to take shape. An acceptance has to be communicated for it to be effective. Therefore, it is prudent to stipulate the method of suitable communication.

Consideration – Courts do not accept existence of an offer and an acceptance as formation of a binding contract. It is the exchange of money or monies worth that seals the deal in an effective contract. The consideration has to be ‘sufficient’ and courts do not get involved in measuring the adequacy of the consideration. It is the offer and the acceptance that would dictate the consideration.

Intention – As much as offer, acceptance and consideration are vital elements of creating a valid contract, intention to create a legally binding contract is a paramount factor. Parties, both offering and accepting, must have the intention to create a legally binding contract.

Lack of intention to create a legal contract is common amongst social relationships whereby transactions take place on understandings. However, when parties’ understandings become ambiguous they then turn to courts to interpret intentions. Usually court relies on the facts and ‘reasonableness’ to elucidate parties’ intentions.

In commercial contracts, parties cannot rely on ‘intention’. The intention to create a legally binding contract would be in existence at the time of the offer and the acceptance in the course of business. Thus, the courts will disregard an argument of ‘intention’ in commercial contracts.

Having considered the four fundamentals, it is about acting with due diligence to ascertain that they complement each other expressly or 'impliedly' for a contract to be recognised as valid in the eyes of the law.