Contract – What is Behind the T's and the C's?

What Is a Contract?

Contracts are currently everywhere and are an essential aspect of law in general. Put simply, a contract is a legally binding agreement between two or more parties. It is vital to understand the foundation and principles of contracts, as they are utilised for a wide range of purposes, including selling products, buying or selling services, selling a business, providing a guarantee, and many more. [1] All of this is controlled by contract law. For a contract to be enforceable, it does not necessarily need to be in writing, as the rules governing contract law also apply to oral agreements and will depend on the conduct of the parties.

What Is Not a Contract?

Whilst it is necessary to know what a contract is, it is also essential to understand what would not constitute a contract. An example of this is price quotations or over-the-counter sales, which would instead be invitations to treat. Agreements lacking definite meaning and Letters of Intent are also examples of what would not form a contract. 

How Do Contracts Work?

Contracts are legally binding agreements that clearly define the rights and obligations of each party involved. They are crucial in directing performance, compensation, and deadlines. In business, contracts are drafted, evaluated by legal teams, and executed either digitally or in writing. If one party breaches the agreement, remedies such as damages or specific performance may be available. Meticulous drafting, adherence to legal standards, and diligent record keeping guarantee enforceability and foster trust among parties, establishing contracts as the cornerstone of commercial and professional partnerships.

Essential Elements of a Contract 

The five essential elements surrounding a contract must be satisfied to establish an enforceable contract. These five elements are: offer, acceptance, consideration, intention to create legal relationships, and certainty. 

Offer:

One of the parties involved will make an offer to the other party (or other parties). Storer v Manchester City Council defines an offer as an explicit statement of willingness to enter into a contract with specific terms with the intention that it will become binding upon acceptance. [2] 

Acceptance:

The other party (or parties will then accept this offer. There is a substantial body of case law regarding what may constitute acceptance. Felthouse v Bindley (1862) highlights that mere silence is not acceptance [3]. However, the most critical concept to understand is that acceptance is a complete and unconditional declaration of agreement with the terms of an offer. [4]

Consideration:

Each party must give consideration to the other party. Consideration encompasses a variety of things, such as a promise to do or refrain from doing something. It could also be a promise to provide something of value; in relation to value, what is provided does not need to be valuable (for example, £1 could be a worthwhile consideration). Some interesting case law concerning consideration in contract law includes Chappel v Nestle [5], which indicates that consideration, though not always adequate, must be sufficient, as well as Currie V Misa, which suggests that consideration is a benefit to one party to the detriment of another. [6]

Intention to create a legal relationship:

An intention to be legally bound by the agreement from both parties (the offer that is proposed by one party, which is then accepted by another) is another crucial element of contracts. As seen in cases such as Edwards v Skyways Ltd [7] and Esso Petroleum Co Ltd v Commissioners of Customs and Excise, [8] commercial agreements are usually presumed to be legally binding. However, as seen in Balfour v Balfour, domestic and social agreements are not. [9]

Capacity:

The parties involved must have capacity. They must be legal entities recognised by law, such as limited liability partnerships, companies, or individuals who are at least 18 years of age.  Once all five elements are satisfied, a contract will become enforceable. 

Real Examples of Contracts:

Contracts can be as simple as entering into membership programmes, but they can also be as complex as merger agreements. An example of a recent contract is the merger between Anglo American and Teck Resources, a deal valued at approximately US $53 billion. According to the agreement, Teck's shareholders would possess 37.6% of the combined company, while Anglo's shareholders would own 62.4%. This case is significant because it represents a major deal in the mining industry. [10]