Introduction
Contract formation represents a core legal concept, establishing the basis for legally enforceable agreements between parties. It concerns the processes and requirements by which a valid contract comes into existence. Technically, contract formation involves specific principles that dictate when a contract is binding and legally enforceable. The key requirements revolve around the presence of an offer, an acceptance of that offer, and consideration, which constitutes the mutual exchange of value between the contracting parties. These principles provide the framework for determining whether there is valid agreement and intent to create legal relations, thus creating a binding contract. Formal language is vital when discussing such a technical topic.
Offer: The Starting Point
An offer is a clear, unequivocal statement of willingness to be bound by specific terms if accepted. The person making the offer (the offeror) must intend to be legally bound, and the statement must be communicated to a specific person or a group (the offeree). The offer must also include all essential terms, such as subject matter, price, and any critical conditions. For example, in Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256, an advertisement offering a reward for using a product was held to be an offer to the world at large because it indicated a clear intent to be bound. By contrast, invitations to treat, such as advertisements in shop windows, are merely solicitations for offers ( Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401), where the customer makes the offer which the shop may then accept or reject, and therefore does not have a direct legal effect.
Acceptance: Agreement to the Offer
Acceptance of an offer is the unqualified and unequivocal expression of assent to the terms of that offer by the offeree. Acceptance must be communicated to the offeror to be effective, though this rule has exceptions. In Adams v Lindsell (1818) 1 B & Ald. 681, the postal rule dictates that acceptance by post is effective when the letter is properly posted, not when it is received. However, this rule does not apply to instantaneous forms of communication, such as telexes, emails or telephone calls; in these cases, acceptance is valid only when it is received by the offeror, as seen in Entores v Miles Far East Co [1955] 2 QB 327 and Brinkibon v Stahlag Steel [1983] 2 AC 34. Silence generally does not constitute acceptance ( Felthouse v Bindley [1862] EWHC CP J35), and any form of conduct, to amount to acceptance, must be capable of establishing the intention to accept the offer. A counter-offer, rather than an acceptance, terminates the original offer (Hyde v Wrench [1840] EWHC Ch J90). In Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 WLR 401, the ‘last shot’ rule was established, stating that the last document containing terms sent by one party which is then received by the other without objection becomes the contract. This traditional ‘mirror’ approach has also been applied in Gibson v Manchester City Council [1979] 1 WLR 294. An acceptance by conduct was further recognised by the courts in Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 where the parties had acted as if they were bound by the terms of the contract.
Consideration: The Exchange of Value
Consideration is what is exchanged for a promise; it can be a benefit to the promisor or a detriment to the promisee. The consideration need not be adequate, but it must be sufficient and of value in the eyes of the law ( Thomas v Thomas (1842) 2 QB 851). Past consideration is insufficient and does not create a binding contract; the promise of payment was not made in response to the action. Performance of an existing contractual duty does not represent valid consideration to vary a contract ( Stilk v Myrick (1809) 170 ER 1168); however, an exception to this has been made where a “practical benefit” to the promisor is found in their promise to vary the original contract (Williams v Roffey Bros & Nicholls [1991] 1 QB 1). In cases of part payment of debt a promise to accept part payment in full satisfaction of the debt is not binding, unless some additional consideration is present as defined in Pinnel’s Case (1602) 5 Co Rep 117a and Foakes v Beer (1884) 9 App Cas 605. The gift of an item in lieu of monetary payment, which provides some form of benefit to the promisor, is considered sufficient consideration.
Intention to Create Legal Relations
For a valid contract to be formed, the parties must intend to create legal relations. In commercial contexts, there is a presumption of such intent (Esso Petroleum v Commissioners of Custom & Excise [1976] 1 WLR 1), unless it is expressly stated to not be binding as in Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445. However, there is a presumption that there is no intention to create legal relations in social or domestic contexts (Balfour v Balfour [1919] 2 KB 571), even if the parties are married, unless the arrangement is considered to be too formal ( Jones v Padavatton [1969] 1 WLR 325). This can also be seen in the modern context where it is found that arrangements between spouses over allowances usually do not constitute a legally binding agreement.
Termination of an Offer
An offer may be terminated before acceptance. An offer is not capable of acceptance where it has been terminated by a valid revocation, or has lapsed after a specific time period, or by a counter-offer, or through the death of the offeror (where that offer was for a unilateral contract). Revocation of a contract offer must be communicated to the offeree in order to be effective (Byrne v Van Tienhoven (1880) 5 CPD 344), and this can also be done through a third party who the offeree believes to be reliable (Dickinson v Dodds (1876) 2 Ch D 463). However, in unilateral contracts, a contract is accepted by the offeree commencing performance of the requested act; as soon as such performance has started the offer cannot be revoked. Therefore, there is an implied obligation on the offeror not to prevent performance by the offeree, as seen in Daulia Ltd v Four Mill Bank Nominees Ltd [1978] Ch 231 and Errington v Errington [1952] 1 KB 290 . An offeror is not bound to not revoke his offer in a mutual contract before the deadline for acceptance (Routledge v Grant (1828) 4 Bing 653; 130 ER 920)
Conclusion
The concept of contract formation provides the bedrock of contract law. A contract needs to be properly formed for legal obligations to arise, and to enable the courts to enforce performance of a valid agreement. It requires the presence of an offer, an acceptance, consideration and the clear intention of the parties to create a legally binding relationship. These elements are central to forming a legally binding and enforceable contract. Any form of ambiguity or incompleteness of any of these factors will lead the courts to rule that there was no binding contract. These frameworks and concepts also form important components of the Solicitors Qualifying Examinations (SQE), requiring any student to demonstrate competence in contract law before qualifying as a solicitor of England and Wales. The technicalities within the doctrine and its evolution continue to inform various aspects of both contract law and its practical application.
