Contracts are legal documents created to demonstrate an agreement on behalf of two parties to undertake a certain endeavour. The subject of the contract can be anything from buying a newspaper (which is a simple sale of goods contract) to building the Large Hadron Collider (a complex contract for services involving immense cross-border construction). Regardless of the type of contract in question, they all have the same basic requirements.
For an agreement to form a binding contract there must be four things:
- an offer;
- acceptance of the offer;
- consideration; and
- the intention to create legal relations.
Unless each of these things is present, there can be no contract.
What Constitutes an Offer?
Offers are relatively straightforward matters in contract law. Almost anything can form an offer, from asking “may I buy your car?” to saying “I need to build a dam across this river, are you interested in the job?” In essence, as long as you are suggesting that you want something and are prepared to give someone else something in return, you are making an offer.
What is Acceptance?
Acceptance occurs when an offer is received in such a way as to make a reasonable person believe the offer has been accepted. This can be anything from saying “yes” when asked “may I buy your car?” to turning up at a river with a surveyor and an architect after being offered a dam-building job. In essence, if you make the other party believe you have accepted their offer, you will have a hard time convincing a court that you did not accept it.
What is Consideration?
In law, consideration is the exchange of anything of value. This can be money (as if often the case in contracts of employment or sale of goods contracts), goods (such as in a contract for exchange of goods), or services (as is often the case in contracts of employment, or contracts for services).
Consideration cannot have no value; which is one of the ways in which a contract is differentiated from a gift. Where there is no exchange of money or goods on the part of one or more parties, consideration comes in the form of benefit received (a house being painted, for example) or detriment undertaken (giving up your spare time to mow someone’s lawn, for example).
Why is Intent Necessary?
Just because something looks for all intents and purposes to be a contract does not necessarily make it a contract. If a father lends his son £1000 to buy his first car, with the agreement that the money will be paid back when the son gets a job, this is not necessarily a contract. If it goes to court, the judge will look at the close family relationship between the father and son, and the presumption that no contract exists between close family members will come into play. This can be rebutted (overturned) by evidence that a contract does exist, of course, but unless such evidence (a written contract, for example) exists, the presumption will stand and no contract will exist.
Similarly, if the son purchases the car on credit but does not make the repayments, he will be unlikely to succeed when the case for breach of contract goes to court. The judge will see that the relationship between son and creditor is not familial but is instead commercial, and the presumption that a contract exists in commercial relations will come into play. The son will find it very difficult to overturn this presumption; although it is not impossible to do so.
So intention to create legal relations is a necessary part of contract law. Necessity goes beyond the commercial and familial presumptions, however. If a person were to offer to loan you a jumper and then never presents a jumper to you, there will be no recourse to the courts in this situation. Aside from the fact that you have presented no consideration and therefore a contract could not have been formed here, the friendly offer to loan a jumper is not a contract-forming offer in the eyes of the reasonable person. The offeror clearly had no desire to form a binding contract and it would be insane to suggest that there would be a situation where the offeror would sit down and draft a written contract with you for the lending of the jumper. In short, the lack of intent to create legal relations kills the possibility that a contract could exist.
So, as we can see, all four requirements must be met before a contract can be formed. It is not enough that offer, acceptance and consideration are present, as intent is a key requirement also. Similarly, offer, acceptance and intent are not enough because one or more parties has presented no consideration and without consideration, there can also be no contract.
As a final point, it is worth noting that in no way does a contract have to be in writing. Contracts can be formed in writing, verbally or even by action. Verbal contracts and contracts formed by action are more difficult to prove in a court without reliance on ample documentation but they are no less binding on the parties involved.