Contracts are essential for business operations, required whenever a business buys or sells goods or services or enters partnerships with other businesses or individuals. It is therefore crucial for business owners to understand the law governing the enforceability of contracts.
In this article, we discuss the key elements of a contract and its formation, which businesses must consider when contracting with individuals and other businesses.
Offer
For a contract to be enforceable, one party must make an offer, which is a promise to enter into the contract on certain terms. The offer must be specific, complete, capable of acceptance, and made with the intention of being bound by acceptance.
This means the offer must consist of final terms that indicate a mutual understanding that no further negotiations regarding its terms will take place.
The offer can be made by one party to a particular individual, a group of persons, or the public at large.
Acceptance
In most cases, a contract is legally binding only if an offer is accepted. Acceptance is a final and unqualified assent to an offer and must be communicated by the offeree to the offeror. It is made in response to an offer and to be effective in creating an enforceable contract it must correspond exactly with the terms of the offer with no variation of the terms.
In certain situations, conduct can be considered acceptance of the offer. For example, if a supplier delivers goods without formally communicating acceptance of an order and then requests payment, the supplier is considered to have accepted the offer. However, conduct will only amount to acceptance if it is clear that the party performed the act in question with the intention of accepting the offer.
Consideration
In most cases, each party to the contract cannot enforce a promise made under the contract unless it has given or promised some form of consideration in exchange for it. Contract law is based on the notion of reciprocity: a promisee cannot enforce a promise unless it has given or promised something in return.
The most obvious example of an agreement that is not supported by consideration, and therefore unenforceable, is an agreement to make a gift, that is, an agreement to provide a benefit with no act or omission being required of the recipient.
The requirement of consideration can be met if the promisee performs a promise at the promisor’s request, even if it does not benefit the promisor.
It is important to note that the law is not concerned with the adequacy of the consideration agreed between the parties nor will it interfere with the bargain they have reached. However, the consideration must hold some value. For example, the sum of one pound has been considered by the Courts as adequate consideration.
Generally, past consideration does not constitute valid consideration under a contract. For instance, if an employer promises extra wages to an employee and the employee later claims these wages in court, the claim is likely to be rejected on the grounds that the employee provided no new consideration beyond their existing duties.
However, a contract executed as a deed may be enforceable even if it lacks consideration.
Intention to Create Legal Relations
A contract is enforceable only if the parties intended to create a legally binding arrangement.
There is a presumption that parties in a commercial setting intend their agreements to be legally binding. This presumption can only be refuted with evidence showing that the parties did not intend for the agreement to be legally binding.
In non-commercial settings, courts consider the parties’ objective conduct as a whole rather than their subjective states of mind to determine if there was an intention to create legal relations.
Certainty of Terms
To ensure the enforceability of a contract, it is crucial that the agreement is complete, clear, unambiguous, and includes all fundamental terms.
If the terms of the contract are incomplete or uncertain, a court may be unwilling to enforce it.
Enforceable Contracts: Other Factors Affecting Enforceability
Several other factors can affect the enforceability of a contract, although they are less common:
- Condition Precedent: Some contracts are subject to a condition precedent, which means certain parts of the agreement will only come into force when specific conditions are met. For example, in share and asset purchase agreements, completion may depend on the repayment of a director’s loan. Or, in loan agreements, funds may be drawn down only after certain conditions are met.
If a condition precedent is not satisfied, the contract may not be enforceable. It is essential to ensure that any agreed condition precedent is realistically achievable to avoid disputes. - Legal Capacity and Authority: The enforceability of a contract may be affected if a party lacks the legal capacity or authority to enter into it. The rules governing an individual’s capacity differ from those governing the capacity of a legal entity.
Individuals are presumed to have the capacity to enter a contract unless they can prove incapacity at the time of entering the contract. An organisation’s capacity is determined by its internal constitution. Additionally, a person must have the appropriate authority to enter into a contract on behalf of the entity they represent. - Legality and Public Policy: The terms of the contract must be legal and comply with public policy to be enforceable.
- Execution as a Deed: Certain contracts must be executed as deeds to be enforceable, such as contracts for the transfer of land or interests in land, some leases, mortgages, and charges. If the contract is not in the required form, it may not be enforceable.
Enforceable Contracts – Commercial Litigation Solicitors: Contact Us
Sali Zaher, Commercial Litigation Associate, is experienced in dealing with disputes relating to contracts. If you have any queries about this topic, please contact Sali Zaher by email at S.Zaher@rfblegal.co.uk or by phone on 020 7467 5766.
Sali Zaher
Associate Solicitor
