When drafting or entering into a commercial contract it is important to understand how legally binding contract terms affect all parties to the agreement.
Well-drafted contract terms should provide certainty and clarity in respect of the contractual obligations and of the remedies available in the event of a breach of contract.
Importantly, however, a contract does not have to be written to be legally binding. Where certain elements are proven to be present, an agreement and its terms may be legally enforceable despite there being no written documentation or formal signed contract.
The key elements of a legally binding contract
Legally binding commercial contracts are agreements or promises between two or more parties — two separate companies, for instance — creating specific obligations, such as the trade of goods or the provision of services in exchange for payment.
To be legally binding, a contract can be written, verbal or even implied, provided the following elements are present:
1. An offer
An offer expresses contractual intent by one party (the ‘offeror’) to another (the ‘offeree’) on a specified set of terms. In other words, where an offer is accepted by the offeree, the offeror intends to be contractually bound by this.
An offer may be made expressly, either orally or in writing, or by conduct. It can be addressed to a single person, to a specified group of persons or to the world at large.
2. Acceptance of the offer
Acceptance of an offer is the unconditional assent, communicated by the offeree to the offeror, to all terms of the offer and made with the intention of accepting.
Acceptance must be brought to the attention of the offeror either by conduct or words. It is possible for the offeror to stipulate the method of acceptance, although it is not possible for silence to be construed as or form the basis of acceptance of an offer.
The offeree must be acceptance of the full terms as specified in the offer itself. Any proposal to vary or change the terms of the original offer will invalidate the original offer and constitute a counter-offer which the original offeror is to accept or reject.
Further, acceptance can only be valid where agreement to the terms is reached fairly and without undue pressure or duress.
Consideration relates to a bargained-for exchange, and the benefit each party expects to receive from signing a contract. For instance, the offeror may expect payment from the offeree for providing a service or trading products.
Importantly, consideration does not have to be ‘adequate’, nominal consideration will suffice to meet the requirement. Each party must make a change in their position by either making a payment, or making a promise to do something you’re not otherwise legally obligated to do, or making or a promise not to do something you otherwise have the right to do such as a promise not to make a claim.
4. An intention to forge an ongoing relationship
For a contract to be legally binding, the fourth requirement is that there is an intention by all parties to enter into a legally enforceable agreement. The specific circumstances of any agreement will be taken into consideration when looking at intention. For example, in commercial or business relations, there is generally a presumption of intention to enter into a legally binding relationship, but thi