Business contracts are formal agreements between parties that outline the rights, responsibilities, and obligations of each party.
To ensure your contract is legally enforceable, it must contain certain essential elements under UK law. There are four essential elements of business contracts. These must all be present for a legally binding agreement to exist, and without them, you will not have created a valid contract. Therefore, you cannot take the other party to court for breach of contract. For this reason, knowing the contractual elements is highly important.
The four key elements are:
- offer;
- acceptance;
- consideration; and
- intention to create legal relations.
What is an Offer?
An offer in the context of a business contract is a clear, definite proposal made by one party to another party with the intent to form a legally binding agreement. The offer outlines the specific terms and conditions under which the offeror is willing to enter into a contract.
The offer should be communicated and specific to the other party so they understand exactly what is being proposed. Both parties also need to be 18 years old and mentally competent for an offer to be valid.
What is Acceptance?
Once an offer is received (usually as a proposal or quotation), the party in receipt of that offer can decide whether to accept the proposal. Just like an offer, an acceptance can be received in writing or verbally, but it can also be accepted by conduct.
The acceptance must also be made in the manner specified in the proposal. If the proposal states, ‘please sign the contract’, then the contract must be signed for the contract to be deemed accepted. This is why we suggest avoiding the need for a signature since an acceptance can be valid in other ways, such as via email, ‘Yes, please go ahead, I will make the payment today’, or implied acceptance by starting the works that have been proposed to you.
Remember, should any of the terms change within an acceptance, this would be a counteroffer and the process starts again, e.g. “I accept your offer, but we want to pay in 60 days”. This would not be a valid acceptance.
What is Consideration?
Consideration is one of the most significant elements of business contracts. It refers to something of value that is exchanged between the parties involved in the agreement. For a contract to be legally binding, each party must provide consideration, which is essentially the reason for the other party to enter into the contract.
In essence, consideration is the “price” paid for the promise made by the other party, though this price doesn’t always have to be monetary. It can be anything of value: goods, services, a promise to act, or a promise to refrain from acting. Consideration is what makes a contract enforceable and needs to be distinguished from being a gift or agreement without legal obligations.
Both parties must exchange something of value. It’s a two-way street; each party must receive and give something in return. If only one party provides consideration, the agreement is not a valid contract. Consideration is usually monetary, but it can also be non-monetary, such as in the form of goods and services.
What is Intention to Create Legal Relations?
Intention to create legal relations refers to the mutual understanding that the parties’ actions or promises will result in being subject to the law of contract. Both parties must intend for the agreement to have legal consequences if one party fails to fulfil their obligations.
In business or commercial agreements, the law typically presumes that there is such an intention. However, in social or domestic contexts, the law often presumes that there is no intention to create legal relations unless proven otherwise.
Conclusion
In summary, a business contract in the UK requires a clear offer, acceptance, consideration, and intention to create legal relations. Preferably, of course, the document will also be in writing, but remember that this is not essential for a contract to be in place. A verbal agreement or an implied contract can be equally valid but more difficult to prove in court should a dispute arise.
Always issue your terms and conditions with any offer that you send to your clients or customers. Should you need any help with drafting your terms and conditions or understanding if they are working the best they can for your business, please get in touch with us at BEB.