Learning Outcomes
After studying this article, you will be able to identify and explain the legal rules that govern contract formation and determine when and between whom binding agreements arise for SQE2 assessment purposes. You will be able to analyse scenarios involving offer and acceptance, intention to create legal relations, capacity, and privity, and apply these rules to advise clients on enforceability of agreements and the rights of third parties.
SQE2 Syllabus
For SQE2, you are required to understand the core principles of how contracts are formed and who is legally bound by them. Focus your revision on:
- the requirements for the formation of a valid contract (agreement, consideration, intention to create legal relations, and capacity)
- distinguishing between an offer, an invitation to treat, and other pre-contractual statements
- the legal effect of acceptance and the rules for communication of acceptance, including postal rule and silence
- termination and revocation of offers
- common law and statutory rules relating to the capacity of parties to contract, including minors and mentally incapacitated persons
- intention to create legal relations in commercial and domestic agreements
- the doctrine of privity of contract and its exceptions, including the Contracts (Rights of Third Parties) Act 1999
- advice on enforceability, variation, and the status of parties in particular scenarios.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What are the essential elements necessary for a contract to be formed and legally enforceable?
- Which of the following is usually an invitation to treat, not an offer? a) Advertisement of goods b) Statement of minimum price c) Goods displayed in a shop d) All of the above
- True or false? If a minor enters into a contract to buy food, the contract will always be void for lack of capacity.
- Which statute gives a third party certain rights to enforce a contract to which it is not a party?
Introduction
A legally binding contract requires an agreement reached with the intention to create legal relations, supported by consideration, and with parties possessing capacity. Understanding how and when an agreement is formed—and between whom it is enforceable—is a core SQE2 contract skill. This article outlines the requirements for valid formation, including the roles of offer and acceptance, capacity, intention, and privity.
The elements of contract formation
A contract exists when an agreement gives rise to legal obligations enforceable by the courts. For an agreement to give rise to an enforceable contract, three core requirements must be satisfied: (1) a valid agreement (offer and acceptance), (2) intention to create legal relations, and (3) consideration. Additionally, the parties must have legal capacity.
Key Term: contract
A legally enforceable agreement between two or more parties, requiring an offer, acceptance, consideration, intention to create legal relations, and capacity.
Agreement: Offer and acceptance
Offer and invitation to treat
A valid contract starts with an offer—a definite promise by the offeror to be bound on specified terms if accepted by the offeree.
Key Term: offer
An expression of willingness to contract on specific terms, made with the intention that it is binding upon acceptance.
An invitation to treat is not an offer—it is an invitation for others to make offers, such as advertisements, shop displays, and auction listings.
Key Term: invitation to treat
A preliminary statement inviting offers or negotiations, not intended to be binding if simply accepted.
Acceptance
Acceptance is the unqualified expression of assent to all the terms of an offer.
Key Term: acceptance
An unconditional agreement to all terms of the offer, communicated by the offeree to the offeror.
Silence does not normally amount to acceptance—something more, such as a positive act or clear conduct, is required. Acceptance can be communicated by words, writing, or by conduct (as long as this is clear and unambiguous).
Communication of acceptance
Acceptance must be communicated to the offeror for most contracts. However, in unilateral contracts—where the offeror promises to pay upon performance of a specified act—acceptance is through performance of that act, and no separate notice is needed unless performance cannot easily come to the offeror’s attention.
Key Term: unilateral contract
A contract in which one party offers an obligation conditional on the offeree performing a specified act, which is completed by performance.
The postal rule is an exception, providing that acceptance is effective when posted, not when received, if it was reasonable to use the post and not excluded by the offer's terms.
Key Term: postal rule
Acceptance is effective at the moment a properly addressed and stamped letter is posted, regardless of whether it is received, if post is an appropriate means of communication.
Termination of offer
An offer may be terminated before acceptance:
- By revocation (withdrawal) communicated to the offeree before acceptance
- By rejection or counter-offer from the offeree
- By lapse of time or stated expiry
- By death or incapacity of the offeror/offeree (unless acceptance had already occurred)
Key Term: counter-offer
A rejection of the original offer by the offeree with the proposal of new terms, terminating the original offer.
Worked Example 1.1
Priya emails to offer to sell Dan her bicycle for £250, "first come, first served." One hour later, before Dan replies, Priya sells it to Zoe after a phone call. Dan emails a clear acceptance an hour after the bike is sold.
Answer:
Dan’s acceptance is ineffective because the offer was revoked before he accepted. Priya’s sale to Zoe constituted revocation, which is valid when brought to Dan’s attention.
Worked Example 1.2
An advert in a local paper states: "Sofas from £399—while stocks last." Is this an offer or an invitation to treat?
Answer:
This is an invitation to treat. Most advertisements are not offers, but invitations for prospective buyers to make an offer, which the seller may then accept or reject.
Intention to create legal relations
Not all agreements are contracts. The law only enforces those made with the intention to create legal relations. There is a general presumption that business agreements are intended to be binding, and that domestic or social agreements are not, unless there is clear evidence to the contrary.
Key Term: intention to create legal relations
The requirement that parties must intend their agreement to give rise to legally enforceable obligations.
Worked Example 1.3
Holly and Sam, flatmates, agree that Sam will cook all week in return for Holly walking the dog daily. Sam does not cook. Can Holly sue for breach of contract?
Answer:
No. This is a domestic/social arrangement and is presumed not to be legally binding unless strong evidence (e.g., written agreement, past disputes over performance) supports such intent.
Capacity to contract
The law protects certain people (minors, people with mental disorders, or under severe intoxication) from being held bound by most contracts.
Key Term: capacity
The legal ability of a party to enter into a binding contract.
Minors
Contracts entered by minors (under 18) are unenforceable except for those for necessaries (goods/services essential and suitable to their condition in life) or beneficial contracts of employment.
Key Term: necessaries
Goods or services suitable to a person's condition in life and actual needs at the time of sale and delivery.
Mental incapacity and intoxication
A contract entered into by a person lacking the capacity to understand its nature and effect may be voidable if the other party knew of the incapacity or intoxication. However, such persons remain liable for necessaries supplied to them.
Worked Example 1.4
Alex (16) buys a laptop for college work on credit. Is the contract enforceable?
Answer:
This contract is enforceable, as the laptop is likely a necessary for education, and the contract is beneficial to the minor.
Privity of contract and rights of third parties
The doctrine of privity states that only those who are parties to the contract can enforce or be bound by it.
Key Term: privity of contract
The rule that only parties to a contract have rights and obligations under it.
Statutory exception: Contracts (Rights of Third Parties) Act 1999
This Act allows a third party to enforce a contract if:
- The contract expressly states that third party can enforce the term, or
- The term purports to confer a benefit on the third party, and the contract does not show otherwise.
Key Term: Contracts (Rights of Third Parties) Act 1999
Statute that enables certain third parties to enforce contractual terms, even if not party to the contract, if the contract so provides or grants them a benefit.
Common law exceptions
- Agency: an agent can contract on behalf of a principal, creating rights and duties for the principal
- Trusts: a party may hold contractual rights "on trust" for a third party
- Assignment: parties may assign their contractual rights to a third party, who can then enforce them (subject to various restrictions)
Worked Example 1.5
A and B agree: "B undertakes to pay C £100 for mowing A's lawn." C is not party to the bargain. B fails to pay.
Answer:
C may enforce the contract directly against B under the Contracts (Rights of Third Parties) Act 1999, provided it is clear the term was intended to benefit C.
Key Point Checklist
This article has covered the following key knowledge points:
- The formation of a valid contract requires an agreement (offer and acceptance), consideration, intention to create legal relations, and capacity.
- An offer must be clear, certain, and communicated; acceptance must match the offer and usually must be communicated, with exceptions for unilateral contracts and the postal rule.
- An invitation to treat is not an offer; most advertisements and shop displays are invitations to treat.
- Offers may be terminated before acceptance by revocation, rejection, counter-offer, lapse, or the parties’ incapacity or death.
- Only parties with capacity can enter contracts; minors and those lacking mental capacity may be bound only by contracts for necessaries or beneficial employment.
- Only parties to a contract may enforce or be bound by it, except as provided by statute (notably the Contracts (Rights of Third Parties) Act 1999), agency, trusts, and assignment.
- Intention to create legal relations is presumed in business, but not in domestic or social agreements.
Key Terms and Concepts
- contract
- offer
- invitation to treat
- acceptance
- unilateral contract
- postal rule
- counter-offer
- intention to create legal relations
- capacity
- necessaries
- privity of contract
- Contracts (Rights of Third Parties) Act 1999