How do I know if I have a legally binding contract?

What is a contract?

A contract is a legally enforceable agreement between two or more parties. Contracts may be written or oral and can arise from a great variety of situations, from employment contracts to agreements relating to buying and selling goods.

For a contract to be legally enforceable there must be:

  • agreement between the parties;
  • consideration;
  • an intention to create legal relations.

Agreement

The agreement requirement of a contract comes in the form of an offer and acceptance. One party makes an offer to the other party, eg, offers the sale of a gold ring for £150. Provided the other party agrees with this, they will then accept the offer and the agreement of the contract is established.

The person who makes the offer must intend to be legally bound (Harvey v Facey (1893)) and for the acceptance to be valid it must:

  • be communicated to the offeree (Entores Ltd v Miles Far East Corporation (1955));
  • its terms must exactly match the terms of the offer (Hyde v Wrench (1840));
  • the agreement must be certain (Scammell v Ouston (1941)).

Consideration

The consideration of a contract is basically the bargaining element of a contract. So, for example, if a person is to buy a bar of chocolate, the one party’s consideration would be the chocolate bar and the other party’s consideration would be the money to pay for the chocolate bar. Both parties therefore provide a benefit in some way to the other person.

Consideration must be something of value in the eyes of the law (Thomas v Thomas (1842)); promises of love and affection would not suffice. However, it does not have to be of market value, it must merely be ‘sufficient’ (Chappel v Nestle (1960)).

Consideration must not be past (ie, if one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past: Re McArdle (1951). However, past consideration may be valid where it was preceded by a request (Lampleigh v Braithwaite (1615)).

Intention to create legal relations

The intention to create legal relations is vital to establish the existence of a contract as it distinguishes between contracts created for the purpose of being legally binding with those contracts that are basically arrangements such as social agreements or decisions made in relation to family dealings.

Where an agreement is made in a commercial setting, the law presumes that the parties intended to create legal relations by the agreement (Esso Petroleum v Commissioners of Customs & Excise (1976)). Conversely, in social and domestic agreements the law raises a presumption that the parties do not intend to create legal relations (Balfour v Balfour (1919)). Both of these presumptions are rebuttable.

Usually there is no requirement of writing in creating a contract and therefore most can be made orally. The one major exception to this rule is in cases involving the sale of land/property.

Bilateral and unilateral contracts

Contracts are most usually bilateral. This means that both parties to a contract undertake some sort of obligation and duty.

In exceptional circumstances where a unilateral contract is formed, only one party to the contract is bound to do anything. This sort of contract could arise in situation where someone offers a reward for a missing item (eg, ‘£100 reward for the safe return of my lost dog’).

The party who offers the £100 reward payment for the safe return of their lost pet, is the only one that is required to do anything, No person is obliged to go out and search for the dog; that’s completely up to the person who chooses to do so. However, both parties will receive some kind of benefit. The one party will receive the safe return of their lost dog and the other party will receive the £100 reward payment.