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Contract formation

Under English law, most contracts can be formed simply, without specified formality, and contracts do not have to be written to be enforceable. Parties can create even complex contracts merely by satisfying the following criteria:

  1. offer;
  2. acceptance;
  3. consideration;
  4. an intention to create legal relations; and
  5. certainty of terms.

A contract can be made orally, and by conduct, provided that these criteria are met. It is, however, often more difficult to evidence oral contracts – and the terms of any alleged agreement – without a document in writing.

i Offer and acceptance

The parties must have reached an agreement, objectively assessed. This is ordinarily done when an offer from one party is accepted by the other.

In order for there to be an offer, it must be communicated to the offeree, specific, complete, capable of acceptance and made with the intention of being bound by that offer. As such, an offer is distinguishable from an invitation to negotiate or an 'invitation to treat', such as an advertisement, where a seller of goods is inviting a buyer to contract but it is the buyer that makes the offer. An offer may be terminated by withdrawal, rejection or lapse of time.

Acceptance is a final and unqualified expression of assent to the terms of an offer. It must be communicated to the offeror and, to be effective, it must correspond exactly with the terms of the offer with no variation. Acceptance can take place by conduct, but it must be clear that the offeree did the act in question with the intention of accepting the offer.

ii Consideration

Consideration is an essential component of a contract. Though consideration does not have to be proportionate or adequate, it must have some value in the eyes of the law. An agreement without consideration is merely an agreement to make a gift.

As a general rule, past consideration will not constitute good consideration. If a party is simply satisfying a pre-existing obligation, it cannot rely upon that as consideration for new obligations being assumed by the other party. Some doubt was cast upon this rule by the decision of the Court of Appeal in Williams v. Roffey Bros. In that case, a party came into financial difficulties and sought additional payment to perform the contract without delay. The Court of Appeal found that good consideration had been given for a promised additional payment as the promisee receives a benefit in continuing the contract and avoiding delay. Many subsequent judgments have been critical of this decision.

The case law on this was reviewed by the High Court in 2017 in Blue v. Ashley. In that case, Leggat J provided clarification, asserting that, although some might be concerned that William v. Roffey Bros opens the window for a party to seek extra payment while threatening to renege on a contract, parties can take comfort that they are protected from this potential mischief by other doctrines such as economic duress and public policy. Further, it remains the case that something that has already been done is not good consideration.

iii Intention to create legal relations

Without a mutual intention to create legal relations, a contract is not formed. When assessing whether there is such an intention, the court will consider the 'objective conduct of the parties as a whole' rather than the 'subjective states of mind' of the parties. In respect of commercial parties, there is a rebuttable presumption that there was an intention to create legal relations.

iv Certainty of terms

There must be no ambiguity to the material terms of an alleged contract. Unless all the material terms are agreed with certainty, a contract is not binding.

v Conditions precedent and subsequent

Parties entering into a contract may wish for certain requirements to be satisfied first, known as conditions precedent. Conditions precedent do not need to be labelled as such, but the wording must be clear that the performance of all or part of the contract is reliant on the conditions precedent being satisfied.

Conditions subsequent are conditions that provide for a binding contract to be terminated (or no longer binding on one or both of the parties) if specified future events do or do not happen.

vi Third-party beneficiaries

Under the Contracts (Rights of Third Parties) Act 1999, any contract made after 11 May 2000, with a few exceptions, may confer an enforceable benefit on a third party, but no contract can impose a duty on a third party. In order for a third party to obtain rights it must be expressly identified in the contract by name, description or as a member of a class.

The beneficiary cannot be implied. However, in the 2017 case of Chudley v. Clydesdale Bank plc (t/a Yorkshire Bank), the High Court held that a third party beneficiary might be identified by analysis of the construction of the express terms of the agreement, provided that the process of the construction did not involve implied identification.

vii Other ways of establishing commercial rights and obligations

In the event that no binding contract exists, it is still possible for the putative parties to that alleged contract to enforce their rights in certain circumstances. Examples are given below.

Quantum meruit

A supplier of goods or services who has not been compensated by the recipient of those goods or services may be able to bring a claim of quantum meruit ('as much as he has earned') in order to be paid for the goods or services provided, so long as it is able to show that the goods or services were either expressly or impliedly requested or freely accepted by the recipient.

Promissory estoppel

In circumstances where, notwithstanding that no consideration has been provided for a promise, the courts consider that it would be unjust to refuse to enforce the promise, the equitable doctrine of promissory estoppel can be relied upon. There are three key elements to promissory estoppel:

  1. a promise by one party that it will not enforce its strict legal rights against the other;
  2. an intention on the promisor's part that the other will rely on that promise; and
  3. actual reliance by the promisee on that promise.

The doctrine of promissory estoppel is available for use as 'a shield not a sword' and can only be used as a defence to an action brought by parties wishing to enforce their legal rights.