The Basics: Do You Have A Contract? Is There A Binding Agreement In Place?

Do you know what you need to form a contract? Have you thought there was a contract in place but the agreement was not binding? Have you been party to a binding contract when you thought you were still trying to reach an agreement?

The process of entering into a legally binding contract may appear straightforward but you must ensure the basics of contract formation are satisfied. If they are not there may be trouble ahead.

How do you form a contract?

Five key elements must be in place before you can have a legally binding contract.

Offer and acceptance

The first two elements can be taken together. A contract is formed when one party has made an offer that another party has accepted.

Acceptance will be the final and unqualified agreement to an offer, acceptance of the exact terms of the offer with no variation.

If an offeree purports to accept an offer but on varied terms, no contract will be formed at that point. That's because the offeree will have made a counter-offer, which, if accepted, will form the terms of the contract.

Consideration

Consideration must have been provided by both parties. This means that a promisee cannot enforce a promise unless something has been promised or given in return.

Unless the contract is contained within a deed, some sort of payment or value must be provided by both parties.

Intention to be bound

The parties must have had an intention to create legal relations. If there was no mutual intention to create a legally binding arrangement there can be no contract.

An intention to create legal relations is presumed in commercial situations. However, if the parties make it clear that they do not yet intend to be bound by the contractual terms - for example if any documents are marked subject to contract (or something similar), there will be no binding contract.

Certainty of terms

Parties do not have to agree every term of a proposed contract before it can be binding. All essential terms must be agreed and the agreement cannot otherwise be uncertain, vague or ambiguous.

The courts can find that the parties have entered into a binding contract even if some terms are still to be agreed. However, if terms are missing they must be capable of being implied by the court - the court must be able to fill in the gaps. In some cases, the court may be able to infer a standard of reasonableness, either on the basis of common law, or statute.

It is always best to agree all important terms if at all possible, to reduce the...