How to form a valid contract

A contract is a legally binding promise made between at least 2 parties in order to fulfil an obligation in exchange for something of value. Contracts can either be written, oral, or a combination of both.

Note that some contracts must be in writing, including the sale of property or a Tenancy agreement. 

Contracts ensure that your interests are protected by law and that both parties fulfil their obligations as promised. If a party breaches (ie breaks) the contract there will be certain solutions available to the parties (known as 'remedies').

Where possible, it is best to have a written contract in place. If the parties disagree on the terms of the contract or if the terms are unclear, it will be up to a court to decide what those terms meant. The court will then have to look at how the services, promises, and exchanges were carried out in order to identify the parties' intentions.

For a contract to be valid, it must have four key elements: agreement, capacity, consideration, and intention. Keep these elements in mind to ensure that your agreements are always protected. 

Agreement

Offer

An agreement happens when an offer is made by one party (eg an Offer of employment) to the other, and that offer is accepted. An offer is a statement of terms to which the person making the offer is prepared to be contractually bound. An offer is different from an ‘invitation to treat’ which only invites someone to make an offer, and is not intended to be contractually binding. For example, advertisements, catalogues and brochures where prices of a product are listed are not offers but invitations to treat. If they were, then the advertiser would have to provide everyone who 'accepted' them with the product regardless of stock levels.

Acceptance

Acceptance of the offer must be unconditional (eg a signature on a Contract of employment) and it must be communicated. Any negotiations between the parties are counter-offers, not acceptance.

Staying silent is not generally considered acceptance unless it is clear that acceptance was intended (eg by way of conduct, like paying for a product). What constitutes adequate acceptance will vary depending on the type of contract.

Capacity

All parties must have the ability to understand the terms of and any obligations under the contract. Consent to the contract must be freely given. This means that there cannot be any coercion/force, fraud, undue influence, or misrepresentation.

Below are the types of circumstances where there is a lack of capacity to enter into contracts: 

• children under 18 - unless the contract is for necessities (food and clothing) or education (an apprenticeship or employment contract) and the terms are fair and benefit the child

• people suffering from mental health conditions or under the influence of drugs and/or alcohol - only if the condition affects the person's ability to understand the nature of the transaction or if the other party is aware of their incapacity

If a person lacking capacity has entered into a contract, it will generally be up to that person to decide if they want to invalidate the contract.

Consideration

Parties must exchange some value for a contract to be binding. This is called consideration. Consideration does not have to be adequate or for the benefit of the other person, it merely has to be sufficient (eg if someone offers to sell their house for nothing, there is no consideration; but if they offer to sell it for £1, then there is valid consideration).

Examples of insufficient consideration include:

• an existing public duty (eg a police officer's duty to protect the public) or contractual duty (eg the production of services already required by another contract)

• something with sentimental value only

• something that occurred before the contract - consideration must move from the contract (eg a gift received in January cannot be consideration for a contract entered into in October)

• anything illegal

Intention

Not all agreements between parties are valid contracts. It must be clear that the parties have an intention to enter into a legally binding contract.

In the case of business agreements, the general assumption is that the parties intended to enter into a contract.

In social situations, there is generally no intention for agreements to become legally binding contracts (eg friends deciding to meet at a specific time would not constitute a valid contract).

It is up to the person who wants the agreement to be a contract to prove that the parties actually intended to enter into a legally binding contract.

You can end a contract for a few reasons. For example, for convenience (eg because a contract is simply no longer needed) or for cause (eg because the contract has been broken). Read Ending a contract for more information.

In all circumstances, you should use a formal written notice (eg a Letter ending a contract) to bring your contract to an end.

The law presumes that some people do not have the power to form contracts. These people are:

• children under the age of 7 

• people who lack mental capacity 

• people who are under the influence of drugs or alcohol

A minor between 7 and 18 years of age can effectively enter into a contract. There is a presumption that a minor in this instance does not understand the implications of entering into the contract. This means that the minor remains protected to the disadvantage of the other party. The minor is able to cancel a contract at any time before reaching the age of 18 and for a reasonable period afterwards without valid reason as the contract is 'voidable'.