Commercial Law

Four Essential Elements of a Commercial Contract

To create a legally binding commercial contract, the agreement must contain four essential elements.

They are:

  • offer
  • acceptance
  • consideration
  • the intention to create legal relations

Commercial contracts do not have to be in writing to be enforceable; however, if a breach of contract occurs, having a written document makes it easier to prove what was agreed.

What is an offer?

An offer is a pledge by a party to another promising to enter into a contract on set terms. It has to be specific, complete and capable of being accepted.

Offers can be preceded by an invitation to treat (for example, goods which are on display in a shop) or they can stand alone. However, invitations to treat are not supported by the intention to create legal relations and do not result in a contract unless followed by an offer and the other key elements of contract formation.

An offer has to be accepted to form a contract but offers are not open for acceptance indefinitely and can be revoked in a number of ways.  However, any revocation of an offer must be communicated to the offeree.

What is acceptance?

Acceptance is the unequivocal agreement to the terms of the offer without any further negotiation. A contract is formed when acceptance is communicated to the offeror.

When acceptance does not match the original offer, the offeree essentially rejects the original offer and becomes an offeror in making a counter-offer. Acceptance of a counter-offer means that the contract is formed on the terms of the counter-offer and not the original offer.

What is consideration?

Consideration is the value exchanged by each party when entering into an agreement.  For example, if you purchase an item of clothing from a store, the consideration provided is the money you pay for the piece.  If there is no consideration, then there is no contract.

In commercial agreements, courts are more likely to find consideration.

What does intention to create legal relations mean

Unless parties intend to enter into a contract, no legally binding agreement can be formed. The courts apply an objective test in determining whether such intention exists. In commercial contracts, there is a rebuttable presumption that the parties intend to bind themselves.

Are there any other elements that must be present to create legal relations?

For a contract to be valid, both parties must have the mental capacity to understand the terms of the agreement and the consequences of entering into it.  Contracts that do not have clear, comprehensive or unambiguous terms may fail for lack of certainty.  Under the doctrine of privity of contract, rights and obligations under a contract only attach to parties to that contract and only parties to a contract can enforce it or have it enforced against them

To find out more about creating or entering into a commercial contract, contact a solicitor who specialises in commercial law.

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