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Businesses, including yours, negotiate and enter into oral and written agreements every day.
It is essential to the effective operation of your business that you and your team understand when a handshake turns into a legally binding agreement.
Failing to grasp this distinction can result in costly mistakes or even litigation! If you want to know how your business can bypass these common contractual pitfalls, continue reading this article and follow us for more useful advice and tips!
THE FOUR KEY ELEMENTS OF A LEGALLY BINDING AGREEMENT
1. OFFER: A specific, complete and unequivocal promise from one party to enter into an agreement with another party on certain terms.
To be valid, the offer must be capable of acceptance. This means that it sets out the basic terms of the agreement and shows the intention that no further bargaining is to take place.
Prior to an offer being made, an invitation to treat (ITT) is sometimes made. An ITT occurs where a party is invited to make an offer. This usually happens in a tendering process, an auction process and even in your adverts!
A simple example of an ITT is goods on display in a shop. In this example, the offer is made when an individual presents the item at the till and the presentation of the goods on the shelf is simply an ITT.
Whilst an ITT is similar to an offer, it is important to note that it is not an offer and therefore a legally binding agreement cannot be based on an ITT.
FGS Tip! Ensure that any correspondence in a negotiation is marked ‘Subject to contract’ which ensures that your correspondence is an ITT and not an offer. This can assist in avoiding any dispute as to whether an ITT or an offer has been made and can even avoid a contract being entered into inadvertently.
2. ACCEPTANCE: An unqualified agreement to the offer.
Any acceptance must be communicated to the individual that made the offer, this can be in writing or verbally, and sometimes even by conduct!
To be effective, the acceptance must be in response to the original offer without any variance. Put simply, if the original offer was to purchase a used car for £5,000 and you confirm that you will purchase the car for £4,500, this is a counteroffer and not valid acceptance.
The acceptance must also comply with the terms of the offer, meaning that if the offer is open for acceptance for 24 hours and it was made at 10:00am on Monday, any acceptance will be invalid if communicated after 10:00am on Tuesday.
Once an offer is accepted, provided that consideration and intention are present, a legally binding agreement will be formed.
FGS Tip! Generally, the party who accepts an offer becomes subject to the other party’s standard terms and conditions. You should ensure that you have sight of these terms and conditions before accepting any offer.
3. CONSIDERATION: In general, a contract is not legally binding unless something (usually money) is given in exchange for the promise.
Consideration is required to be given at the time that the contract is entered into.
As a result, past consideration is not valid consideration.
For example, if a bank provides a loan to your business without any contract being entered into and a month later they ask you to enter into a contract for the loan, there will be no valid consideration and therefore no legally binding agreement. Your business and the bank would be able to enter into a legally binding agreement if new consideration in the form of an additional loan is provided. In these circumstances, only the value of the new loan would be covered by the new agreement.
Interestingly, consideration does not need to represent the market value, it just has to be present. This means that a bad deal could be struck where the consideration is deemed to be inadequate and the contract would still be legally binding.
FGS Tip! Where an agreement is executed as a ‘Deed’, consideration is not required. If you are unsure whether valid consideration is present, it might be worth executing the agreement as a deed to ensure that the agreement is legally binding.
4. INTENTION: The parties must have a mutual intention to create a binding agreement.
FGS Tip! Intention is automatically presumed in a commercial setting! If you do not intend to enter into a legally binding agreement, you should state that the agreement is not intended to be legally binding on the agreement and/or in any correspondence regarding the agreement.
Entering into a legally binding contract inadvertently or believing you have entered into a legally binding contract when you haven’t is the cause of almost 25% of all commercial disputes and litigation in England and Wales, don’t let your business become part of this statistic!
FG Solicitors’ expert commercial legal advisors can assist you and your team with your commercial contracts. Contact FG Solicitors today on 0808 172 93 22 or complete our quick contact form for a no obligation discussion!
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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.