Out-Law Guide | 30 Mar 2005 | 2:56 pm | 9 min. read
This guide was last updated in February 2008. It is based on the laws in the UK (and it explains differences between the position in England and Wales and the position in Scotland).
See also: Online contract formation
A contract is an agreement reached between two or more parties which is legally enforceable when executed in accordance with specific requirements. Contracts should be project specific and reflect the agreement between the parties. Contracts are obviously a key part of every business and it is therefore fundamental that all parties to a contract understand the terms included in a contract and the rights and responsibilities of the parties under that contract.
Every contract should have:
'Acceptance' of an offer occurs when there is an unqualified acceptance of all the offered terms. However, this is unusual and there will normally be a period of negotiation. New terms and conditions introduced through negotiation in effect amount to a series of counter offers to the original offer, cancelling the terms of the original offer.
A contract offer has only been accepted when the acceptance is brought to the attention of the offeror. This applies in the case of instantaneous communication, such as by telephone, where the party giving acceptance will often know at once if a communication is unsuccessful so will have the opportunity of making a proper communication. The exception to this rule is when the acceptance is posted. The offer is deemed to be accepted when the offeree posts their acceptance.
The now commonplace use of email raises the question of whether the "postal acceptance rule" applies to emailed acceptances. Currently there is no statutory law on this point. The contract could be formed when the email acceptance is read or when the email acceptance is sent. If the parties to a contract wish to send notices by email then specific provisions should be included which set out when a notice sent by email is deemed to be received.
As a general rule, silence does not constitute acceptance.
Consideration is the requirement of reciprocal obligations on the parties to a contract. Both parties must receive valuable consideration for performance of their side of the contract. Consideration is not required in Scotland where donation is accepted in the law of contract. However, it is extremely unlikely that a commercial organisation would provide goods or services for free.
Contracts can be in writing, made orally, or created through the actings of the parties. For clarity, most commercial contracts are in writing to maintain a proper record of the agreement. Oral contracts create a greater potential for disputes on the terms with the parties having problems evidencing their position.
Contracts can be formed through a course of dealing between the parties. Again, the terms and conditions may not be clear. Common terms are likely to be incorporated in these contracts but if they are not written down there are still evidential problems.
It is common for contracts to be on a company's standard terms and conditions. Problems can arise when both parties purport to contract on their own standard terms and conditions. Qualified acceptance of an offer while imposing your own standard terms and conditions is seen as a counter offer. Obviously being unaware of which terms and conditions the parties are contracting does not provide the desired clarity or certainty of the contract.
There are different tactics for those parties who wish to contract on their own terms and conditions including incorporating the terms into as many pre-contractual documents as possible and ensuring that the terms appear on the last document between the parties before the delivery of goods.
In general the following terms should be included in any contract:
Specific types of contracts will require specific terms, which are particular to the relevant type of contract. Examples of specific types of contracts where specific terms are required include software licence/development contracts, facilities management contracts (See: Facilities management contracts: 10 tips) and outsourcing contracts (See: Outsourcing).
Certain terms may be implied into contracts by law, or by usage or custom. The Sale of Goods Act and the Sale of Goods and Services Act contain terms which are implied into all contracts for the sale of goods and services, primarily for the purpose of consumer protection. The supplier of goods or services must provide goods of a satisfactory quality which are fit for the consumer's purpose or perform the services with reasonable skill and care.
A more general statute to protect buyers is the Unfair Contract Terms Act. This Act seeks to prevent parties limiting or excluding their liability in contracts. Generally, any exclusion of liability must be reasonable.
Written contracts must be executed in accordance with specific requirements otherwise they will not be legally enforceable.
Following a change in the law in 1995 in order to execute a deed only a signature is required. However to be formally valid a document should be subscribed by the granter and witnessed by one other aged person at least 16. It is worth noting that when carrying out any due diligence on contracts executed pre-1995 those contracts should have two witnesses before they are legally enforceable.
If a document containing contractual terms has been signed, in the absence of fraud or misrepresentation, the signatory is bound by the terms even if he has not read them.
If a document is unsigned a party is not bound unless he is aware that the document contained contract terms or the other party had taken reasonable steps to bring the terms to his notice. Stringent tests are applied to electronic contracts.
Directors who sign on behalf of a company do so in their capacity as the company's agent. Contracts signed in this way are treated as if they had been made by the company itself and it will be bound.
Once the contract has been concluded it is important to monitor its performance. Often there are governance mechanisms set out in the contract which govern the relationship between the parties, and provide forums to monitor performance and deal with change. Internally, each party should check that the other is fulfilling its obligations and that any timescales and payment plans in the contract are being adhered to. It is useful to have regular project meetings to ensure that everything is going according to plan and to solve any problems as they arise.