Around the world, many millions of contracts are made every day. These include contracts for the sale of goods, such as oil or computers, or for the provision of services, such as banking or insurance. People enter into many contracts every day, often without even thinking about it. For example, every time you buy a bottle of water from a shop or a train ticket, you are entering into a contract with someone.
In this post, we are going to look at the legal requirements for the formation of a contract under English law. It is important to remember that English contract law is not codified. Most of the foundational and fundamental principles of English contract law have been developed by the English courts, over many years.
So, what are the requirements (often called ‘the essential elements’) for the formation of a legally binding and enforceable contract under English law? There are four essential elements. These are:
An offer is the indication by one person (called ‘the offeror’) that they are prepared to enter into a contract with another person (called the ‘offeree’) on terms which are fixed when the offer is made. For example, if I say to you, ‘I will sell you my pen for £5’, I have made you an offer.
However, it is not always clear whether someone is making an offer or doing something else. For example, what if I place an advertisement online which says that I have a car for sale for £5,000 ‘or nearest offer’? And what about goods (such as our bottle of water) which are on display in a supermarket? Is the supermarket making an ‘offer’ to sell me the bottle of water?
Once an offer has been made, the second element which is required is ‘acceptance’ of the offer by the other party. If I offer to sell you my pen for £5, you can accept the offer by clearly stating something like, ‘Yes, I agree.’ However, once again, acceptance is not always straightforward. For example, what if you say, ‘I like your pen, but I don’t want to pay £5 for it. I will give you £3’? In this situation, you will not have accepted my offer, in law, but have made me a ‘counter offer’.
In some jurisdictions around the world, an offer which has been accepted would be all that is required to form a legally binding contract. However, English law requires more than just offer and acceptance.
The concept of ‘consideration’ in English law is a bit like an elephant; you know it when you see it, but it is not easy to describe or define. Essentially, it means that both the offeror and offeree must bring something to the bargain (or agreement). There is what is called a ‘mutual exchange’ of something valuable between the parties.
If I offer to sell you my pen for £5, and you accept my offer, we are both bringing something to the bargain. There is a mutual exchange of valuable things: the pen and the £5. We both gain something and lose something. I will gain your £5 but will lose my pen. You will gain my pen but lose your £5. This is sometimes called ‘benefit’ and ‘detriment’: benefit is what is gained, and detriment is what is lost.
Consideration is a very important aspect in English contract law. If consideration is not present, you will not have formed a legally binding contract.
4. Intention to Create Legal Relations
The fourth essential element is that the offeror and offeree must have intention to create legal relations. The main question to ask is, ‘Do the parties intend this agreement to be legally binding?’
An example may help. Alan asks his friend Beth if she wants to go to the movies and watch a film that night at 7pm. They agree that Alan will buy the tickets and Beth will buy the popcorn and soft drinks. Alan goes online and buys the tickets, as agreed. However, at 6.30pm, Beth sends a message to Alan saying she has changed her mind and is not coming. Can Alan bring legal proceedings for breach of contract against Beth?
The answer is no. Although there is an offer, acceptance and consideration, there is almost certainly no intention to create legal relations. The parties intended no more than to enter into social relations; it was an informal, social arrangement between Alan and Beth.
These are the four essential elements required for the formation of a legally binding contract in English law and they must all be present.
See you next time.
© Cambridge Legal English Academy 2020