This article aims to provide an overview of the basic elements that are needed to form a legally binding contact. Using the basic principals detailed in this article, a school business professional, procurement officer or procurement manager should be able to identify if their specific contracts/agreements/partnerships/arrangements (the name is immaterial) could be considered in a court of law as being legally binding.
The article also provides contract management best practise information which will help your organisation to monitor contracts.
How is a contract formed?
A contract is an agreement between two or more parties. The party making the offer is called the ‘Offeree’ and the party accepting the offer is called the ‘Offeror’.
To have a valid contract under English law you must have:
- A clear offer and an acceptance from both the Offeree and Offeror
- Intention to create a legal agreement
- Consideration in the form of money.
We’ll now explore each element in more detail.
Offers can be made in different disguises:
- Quotation – A quotation provides an exact price for the goods or service being offered. A quotation is a fixed price and cannot be changed once accepted (unless the scope of the project changes)
- Estimate – An estimate provides a ‘guesstimate’ or rough idea of what the job may cost. The Offeror needs to ensure that if they accept an estimate, the final costs could increase or decrease from those detailed in the estimate
- Verbally – A court of law will accept a verbal contract exists if it can be proven. Proving a verbal offer was made can be very difficult and the Offeror should always look to ask for verbal offers to be evidenced in writing at the earliest opportunity
- Tenders – A tender submission is a formal offer and will contain more detail than a quotation including but not limited to prescribed terms and conditions and declarations
An offer lasts until it has been:
- Accepted – It must be accepted in the manner allowed for in the offer, or clearly communicated to the Offeree by the Offeror
- Rejected – The Offeror simply declines to accept the offer
- Revoked – It can be revoked at any time before acceptance
- Lapsed – An offer lapses on the death of either party, after the expiry of a given deadline, after a ‘reasonable’ time and it may expire when a contingency no longer exists.
It is common for suppliers to state a period in which an offer is valid for. The significance of the set period is to enable the offer to be automatically closed if neither party does anything during that period. It should be noted that an Offeree can revoke an offer at any time they choose.
If the Offeror makes a ‘counter-offer’ to the offer that was made by the Offeree, the original offer is deemed to have been rejected and the Offeree has no obligation to allow the Offeror to return to the original offer.
Simply advertising something for sale is not an ‘offer’, it is an ‘invitation to treat’. In this scenario the buyer makes the offer to purchase and the seller would accept their offer. A good example is a supermarket, the shelves are full of produce which is inviting you (the buyer) to make the offer to buy the goods. Once the transaction is processed through the till, the supermarket has accepted your offer to buy.
The Offeror should ensure that their acceptance can be evidenced. The easiest way to evidence acceptance of an offer is to accept the offer in writing. A common way of evidencing acceptance of an offer is to issue a purchase order. Contracts do not have to be in writing to be legally enforceable. A verbal contract could be considered as legally enforceable, if it can be proven. The one exception to verbal contracts is a contract for the sale (or other disposition) of land or property. This type of contract must be in writing and contain all the terms agreed, otherwise it is not enforceable.
Both parties must have intended the contract to be legally binding to make a valid contract. Agreements may sometimes state ‘subject to contract’, in these scenarios the agreement is not legally binding upon anybody.
In the simplest form, consideration is normally money i.e. goods are supplied in return for money. An alternative to money can be goods or services (in a barter agreement). The inclusion of services that have already been performed cannot be used as consideration.
The reason why some businesses are sold for £1 is because the sale contract needs an element of consideration to make the contract valid.
Contract management best practise for educational establishments
Schools, academies, colleges and universities all have many different contracts in place at any time. Good practise is to record all contracts and their key dates onto a contract database (an excel spreadsheet works fine), so that a record exists for all legally binding commitments. This will also help you monitor when each contract is due for review and renewal.
Contract management support
If you need support or would like to learn more about contract management see our Contract Management Services page.