We enter into contracts everyday without even thinking about it and they are incredibly important for everyday life. Most people could easily identify contracts they’ve signed in the past, such as a tenancy agreement or their employment contract. However, the definition of a contract covers a far wider range of situations than many people imagine.
So, what is required for a valid contract?
There are three essential agreements for a valid contract: Agreement, consideration and intention to create legal creations.
1. Agreement
Agreement is made up of an offer and acceptance. An offer is a willingness to enter into a contract on certain terms. The person making the offer is the offeror and they must intend their offer to become legally binding as soon as it is accepted by the person to whom it is made (the offeree).
An offer needs to be distinguished from an invitation to treat. This is when someone is simply inviting negotiations and does not mean to enter into a binding contract. There is a general principle that goods on display in a supermarket and self-service shops are regarded as invitations to treat, rather than an offer by the shop. The case that established this principle was Pharmaceutical Society of Great Britain v Boots Cash Chemists. A contract will become binding from acceptance so its good news for customers that a loaf of bread on the shelf is simply an invitation to treat. If this was an offer, every time you put an item in your basket, it would be counted as acceptance and you’d have to buy it or be in breach of contract!
Acceptance must be a complete and unqualified acceptance of the all the terms of the contract. This is where the offeree communicates their acceptance of the offer and the contract will become binding .
So in our supermarket scenario we know the bread of the shelf is only an invitation to treat. The offer is made by the customer at the till. They are offering to buy the bread. Acceptance comes as the payment point when the supermarket agrees to your offer of buying the bread for a certain price.
2. Consideration
Consideration has been defined in terms of being a benefit and/or a detriment to the parties. For example, if you sell your car for £3,000 you are getting the benefit of the £3,000 and the detriment of transferring ownership of the car. The buyer is getting the benefit of the car and the detriment of paying £3,000. Consideration can also be based on promises such as what one party does or promises to do for the other party’s promise.
So in the bread scenario above, the supermarket are providing you with bread and in return you are giving them money. The money you pay will be good consideration for the bread. And the bread is good consideration for receiving the money.
3. Intention to create legal relations
For a court to treat an agreement as legally binding there needs to have been intention between the parties that the agreement is legally enforceable. This is easily achieved through formal requirements, such as writing an intention into a written and signed contract. This will clearly demonstrate the parties’ intention. In cases where this cannot be established there are presumptions based on whether as agreement is a domestic/social agreement (e.g. agreement between family members) or a commercial agreement (if an agreement is not deemed to be domestic).
In domestic agreements there is a presumption that there is no intention to create legal relations and therefore the agreement will not be legally binding. However, the opposite presumption exists for commercial agreements, as it presumed the parties intended to create legal intentions. Both of these presumptions are rebuttable with evidence. Therefore it is possible to have a legally binding contract between family members.
If all three elements are met there will be a legally binding contract.
Conclusion
Let’s put this in the everyday context of going to the shop to buy a bottle of milk. We know that the milk on the shelf is simply an invitation to treat. The customer makes an offer to buy and acceptance is made by the supermarket at the point of payment. Consideration will be the money in exchange for the milk. As it is a commercial context, there will be a strong presumption that there is intention to create legal relations. As a result, you have a contract with the shop for the milk. This means if there is something
wrong with the milk, the supermarket will have breached an implied term of the contract and you will have a claim against the supermarket for breach of contract.
