Formation of Contracts in English Law – The General Framework
The next AKT post adresses one of the key peculiarities of English contract law – the requirement of consideration in formation and variation of contracts.
After the initial discussion of the importance of English contract law for international commercial transactions https://www.akt.rs/en/publication/english-contract-law-and-its-importance-for-international-commercial-transactions this AKT post starts from the beginning – the formation of contracts. The aim is to provide a general framework of key requirements and discuss briefly three of them – agreement, intention and compliance with formal requirements. The next AKT post adresses one of the key peculiarities of English contract law – the requirement of consideration in formation and variation of contracts.

The rules on formation of contracts in English law are of general nature, and in principle apply across business to business/business to consumer/private party to private party contracts. These have been primarily formulated through court-made common law as opposed to legislation.

In general, to create a legally binding contract under English law there needs to cumulatively exist:

Sufficiently certain and complete agreement of the parties concerning the content;
Consideration to support the agreement, unless the contract is made by a deed;
Intention by the parties to create legal relations;
Compliance with any potential formal requirements, as imposed by legislation.

What follows are some remarks on these conditions from a commercial perspective.

Sufficiently certain and complete agreement

The agreement in bilateral contracts is traditionally found by identifying an offer of one party that was matched by an identical acceptance of the other, although there is a degree of flexibility by English courts even if offer and acceptance cannot be easily distinguished. It that sense, especially for commercial situations, signing a contract with agreed terms suffices.

During negotiations, however, it is important to note that making a counter-offer is deemed to terminate the original offer of the other party, so that original offer cannot be accepted any more. Offers can be revoked at any point before acceptance (unless the other party provided something in return to keep the offer open) or they may expire on their own terms. Both acceptance of the offer and revocation of the offer must be communicated to the other side, that is the other side must be considered to have received the notice. This applies to modern means of communication (e-mail) as well, although there is a degree of uncertainty as to when exactly an email is considered to be ‘received’ by the other party.

Final point of interest is that not all communications that resemble offers are actually offers in English law. Most importantly, the display of goods for sale; advertisements of goods for sale; and invitation to tenders are considered to be ‘invitations to treat’, meaning they are invitations to commence negotiations about a contract, and not to immediately conclude one.

Intention to create legal relations

As a general rule, to create a contract, parties must have an intention to create legal relations. This intention serves as a filter between those agreements that are planned to be legally enforceable and those made either in the social context or as ‘‘gentlemen’s agreements’’. Although context can influence this, there is a rebuttable presumption in English law that this intention does not exist in agreements made in a domestic/family/social context, and an equally rebuttable presumption that it does exist in the commercial context.

A point to be further aware of in the commercial context is that any discussion or even a (draft) agreement that is expressly stated to be ‘subject to contract’ is not legally binding, because such a statement negates the intention until the final contract is concluded. Likewise, until all the parties have signed the contract (if it is intended to be a written one), it is generally considered that the intention to create legal relations does not exist.

Compliance with formal requirements

The general rule is that contracts can be made in any form – writing, orally or by conduct (including their combinations) and can also be altered in any form, regardless of how they were initially concluded. There are, however, some important exceptions. Some are introduced by legislation, as in the case of contracts for sale or other disposition of interest in land or contracts of guarantee (both are required to be in writing and signed). Some are, however, imposed by common law. A very recent example is the decision of the Supreme Court that where parties explicitly agree in a written contract that such a contract can only be altered in writing (so called ‘no oral modification’ clauses), the general principle of the freedom of form is displaced and any modification must be in writing as per parties’ agreement.

The next post will address the controversial doctrine of consideration in English law. In the meantime, as always, AKT remains at disposal for any advice in relation to these matters.

Velimir Zivkovic