What makes a contract legally valid?

Whether you engage in business-to-consumer or business-to-business transactions, a contract that is subsequently found to be legally invalid can be a financial disaster for your business.

This poses the question: what makes a contract valid?

In simple terms, a legally valid contract must satisfy the following four requirements:-

1. An offer must be made from one party to another and that offer, on the stipulated terms, must be accepted;
2. The contract must contain some form of “consideration” i.e. an exchange of something for something. A common example would payment by one party for the provision of goods or services from another party;
3. the parties must both have ‘capacity’ to enter into the contract (e.g. be of legal age and of sound mind); and
4. there must be a clear mutual intention to create a legally binding contract.

Whilst these requirements may seem fairly straightforward on the surface, recent decisions by the courts continue to highlight the uncertainty when it comes to the issue of whether a valid contract exists.  

A recent case (Farrar v Rylatt 2019) illustrates the point and involved two parties who had agreed and prepared Heads of Terms setting out the nature of their joint venture. Although the Heads of Terms were never signed, they were emailed to the appropriate individuals and work started.

When one party sought to rely upon the Heads of Terms, the court found that they were not valid and therefore enforceable due to the fact that they had not been signed and, amongst other issues, the language used within the Heads of Terms indicated a future agreement, not an existing one.

Uncertainty is evident here as previous case law has confirmed that a contract does not have to be signed in order to be valid. However, the courts found in this circumstance that the lack of a signature together with the language used was integral to their decision.

This is a reminder that the formalities of a contract must have very careful consideration given to them in order to prevent issues which prove to be extremely costly later down the line.

With case law developing all of the time in terms of the courts’ attitude to contract formalities and the increased use of email and technology to create contracts, all businesses need to be very clear as to what and, often crucially, they have finally reached an agreement.

Please get in touch with our Corporate and Commercial team should you have any queries regarding a contractual arrangement you have.