When Is A Contract Formed Between Businesses?

It is not always easy to know when a contract has reached the stage where it is binding.

Often there are complex negotiations that take place beforehand and there can be memorandums of understanding and heads of terms that have been agreed before a formal contract has been signed.  My clients often ask me if it is essential to have a signed written contract or is it enough that they have sent through their terms and conditions before the contract commences.

What I have tried to do is outline the basic principles when agreeing business contracts and to give some tips when negotiating and how to protect your position.

Forming a contract

There are five essential elements for the formation of a contract-:

1. An offer
2. Acceptance
3. Consideration
4. Intention to create legal relations; and
5. Certainty of terms

If one of these elements is missing then there will not be a binding contract between the parties.

Apart from a few exceptions a contract does not need to be in writing nor signed by the parties to be binding. A contract can be agreed orally, by email or by the conduct of the parties.

A contract is formed as soon as an offer is accepted, so realising the offer was too generous is not good reason to withdraw it unless it was made in obvious error (e.g. offering to be paid £1,000 rather than £100,000).

Tips when negotiating a contract

When you are trying to agree the terms of an agreement and you do not want the possibility of there being a deal before all the terms are agreed,  make the negotiations subject to contract.  It is often useful to head all draft agreements as “Subject to Contract” and make clear that a contract is only binding when it is in writing and has been signed by all parties.  Problems arise where the parties start work on part of the contract before all the terms are agreed.   Try not to!  If you do ensure this element is clearly separate and the balance remains subject to contract.  Agree an initial limited scope.

Always ensure that consideration has taken place. This is simply the exchange of one thing of value for another.  A good tip is to ensure that if you are purchasing something that you insert a nominal value for it I.E. £1. If there is no money changing hands  you can sign a deed which is another form of document which does not need consideration.

Do not leave the crucial terms to be agreed later, that might leave you open to liabilities and payment on terms you would never have agreed.

Battle of the forms

These days a lot of contracts are concluded by email and exchange of standard terms and conditions. They will be no signature and often it may be many years before there is a problem between the parties. It is often the person that sent over the last terms and conditions or “fired the final shot” that will prevail.

It is important before you enter into a contract that you are certain as to what terms and conditions govern the contract. If you wish to ensure that your terms and conditions apply then it is always worth making sure that trading is expressly on the basis of your terms and conditions.    Bear in mind that for your terms to apply they must be sent through to the other side before the contract is agreed, so sending them for the first time on the back of an invoice will not work, by definition  an invoice demands payment for existing contractual liabilities.   Make sure your T&Cs are sent through at an early stage.

What happens if I do not have a contract?

Even if it is decided that you do not have a contract with another business stipulating the amount due for services or goods supplied then you still may be able to get paid under the laws of restitution for quantum meruit  (you get paid a reasonable  amount).

Business contracts in terms of agreeing a contract or looking to enforce it can be complex. If you need legal help in this area then you can approach Wilson Browne LLP. Many of its teams are recognised in the Legal 500 and was a winner of the best  large law firm in Northamptonshire in 2018. In the first instance contact the New Enquires Team who will be able to put in you in touch with a member of the Commercial Litigation or Corporate and Commercial teams.

If you require help when negotiating a contract then contact us here at Wilson Browne. You will find us approachable and able to talk to you in a pragmatic way which is easy to understand.

If you need any Litigation advice, contact the Specialist Litigation Team.