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Formation of a Contract

Tuesday, 10 July 2012

A common misconception is that a contract is simply a written agreement between two parties. This is not the case; a contract may be made orally or even implied - lack of written terms can make a contract harder to enforce but do not necessarily deny its existence. There are also a number of factors that must be satisfied before an agreement is actually deemed a contract.

The most straightforward definition of a contract is a voluntary agreement entered into by two or more parties with an intention to create legal relations.

Basic Elements of a Contract

A contract can only be made between two or more parties, a person cannot form a contract with themselves. The parties must exist at the time the contract is made, so a company must be formed before the date of a contract if it is to properly be a party. They must also have capacity to contract – exclusions apply to minors, bankrupts and persons of unsound mind for example.

There are three main elements that must be in place for the formation of a contract:

  • Offer and Acceptance
  • Intention to create legal relations
  • Consideration

Offer and Acceptance

Taken together offer and acceptance usually form the basis of the agreement for which a contract is made. There must be an offer on ascertainable terms which receives unqualified acceptance. Traditionally this was considered a concurrence of wills or meeting of minds of the parties; the modern legal test relies upon a reasonable person believing that the agreement was the objective intention of the parties.

The offer is made by one person expressly or by implication to another expressing a willingness to be bound by a contract.

The acceptance is an indication by the other party expressly or by implication of its willingness to be bound unconditionally by the contract within the terms stated by the offeror.

Intention to Create Legal Relations

Although offer and acceptance form the basis of an agreement between two parties, there cannot be a contract unless there is an intention to create legal relations. In most cases the intention of the parties will be clear one way or the other. If there is any doubt, the test used by the courts is an objective test as to what a reasonable person would consider to be the intention of the parties.


In the absence of consideration, an agreement is simply a bare promise which the courts will not enforce. Consideration can be defined as anything of value meaning some right, interest, profit or benefit accruing to the promisor or some forbearance, detriment, loss or responsibility that has been given or suffered by the promisee, or both.

Rollingsons has lawyers experienced in drafting and negotiating contracts; if you need advice or would like more information please contact James Crighton via e-mail or by telephone on 0207 611 4848.