How is a contract formed?
In this series, James Spargo Litigation Executive (BA Hons, GCILEx) will look at the very basics of contracts. The Specters team are always happy to provide advice on all types of contracts.
There are three basic things needed for a contract to be formed:
- Offer and acceptance
- Intent to create legal relations
Offer and acceptance
Although this is a surprisingly complicated area and there has been a lot of debate among the Courts about when and where an offer is made, for the vast majority of contracts, this is simple.
Either one party makes an offer to provide a certain thing at a certain price and the other party says yes, or one party offers a certain price for a certain thing and the other party says yes.
This certain thing could be almost anything. You might offer to buy an orange, you might offer to sell your house or you might offer to come and work for the other party and provide labour.
Offers and acceptance can be in writing or verbal, although with 99% of contracts, we would always advise that you get something in writing with the main terms of the agreement. This is because if there are any disputes in the future, having the terms written down is beneficial.
It is also possible to make an open offer. If you put a poster on a lamppost offering a reward for the return of your lost dog, you would be making an offer. Another person could accept this offer by returning your lost dog and claiming the reward.
This is simply what you offer in exchange for what the other party is offering. If you buy an orange in a corner shop, then your consideration is the money to pay for the orange and the shop’s consideration is the provision of the orange in exchange for money.
Consideration is not always money for goods. Consideration can be goods in exchange for goods, if the parties agree to swap something. It can also be services in exchange for services; you may agree to mow someone’s lawn if they walk your dog in return.
In all of these cases, one party is exchanging something in return for something from the other party.
The exception to the rule that each party must provide consideration, is if one party’s offer is contained in a deed. In that case, the person accepting the offer does not need to provide anything in exchange.
Intent to create legal relations
In a lot of ways, this is the simplest of the three requirements. Technically, it means that when the contract is made, each party must intend for the contract to be legally binding. Courts will assume in most cases that the very act of making a contract shows an intent that it should be legally binding.
Difficulties can arise when contracts are made between family members or between friends, as in these cases the Courts will assume the opposite and it will be for the party attempting to rely on the contract to prove that the other party intended the agreement to be legally binding.