What makes a contract? An Expanded explanation on Contract Law

Offer: An offer is a promise by one party to enter into a contract on certain terms. It must be:

Promise of contract
Specific
Capable of acceptance.
Made with the intention of being bound by acceptance.

Therefore, an offer must contain the basic terms of the agreement and evidence an intention that no further bargaining is to take place.

Offer or invitation to negotiate?

What is an invitation to treat?

English lawyers use the expression “invitation to treat” or “mere invitation to treat” to refer to an invitation to negotiate which displays no intention to be bound at that particular moment. An invitation to treat is distinguishable from an offer, which has the attributes mentioned in the preceding paragraph. In particular, in order to form the basis of an enforceable contract, an offer must be made in circumstances which indicate that the offeror intends to be legally bound.

Examples of invitations to treat

Common examples of invitations to treat include advertisements indicating that a party is willing to enter into a bilateral contract (for example, an advertisement announcing that an asset is for sale), and the display of goods for sale in shops. The well-known case on shop displays is Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] EWCA Civ 6. By analogy, and depending on all the circumstances, the description of goods on a web site would probably be considered as an invitation to treat. (This can be made clear in the website terms of use.) However, the display of goods in an automatic vending machine probably amounts to an offer, as no further bargaining is possible.

Auctions and tenders

In auction sales and tender procedures, it is usually the bidder that makes the offer in response to the seller’s invitation to treat. The seller should take care not to bind itself unwittingly to a contract by stating in its invitation that the highest bid (in an auction for sale), or the lowest bid (in a tender), shall be the successful bid. Such statements may go beyond an invitation to treat and may in fact amount to an offer which is accepted by a bidder (see Harvela Investments Ltd v Royal Trust Co of Canada [1984] 2 All ER 65). If this is not what the seller intends, then wording should be included in the invitation to participate stating that the highest or lowest price will not necessarily succeed. This will help to show that the seller does not intend to be bound and point towards an invitation to treat rather than an offer.

To whom can an offer be made?

An offer can be made to a particular individual, a group of persons, or even to the world at large (as in the case of an advertisement of a unilateral contract in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256).

Incorporating terms into a contract

`Incorporation by reference

As stated above, an offer needs to be complete, in the sense that it needs to contain all the information intended to form part of the contract. If an offer attempts to incorporate terms into the contract by reference, the offeree must have a reasonable opportunity to read the terms and conditions.

For an example of the practical application of the rule in the lower courts, see Excel Parking Services Ltd v Martin Cutts, Stockport County Court (Motorist wins 18-month ticket battle after judge agrees Stockport parking signs were “too small”, Manchester Evening News, 16 September 2011). Here the judge agreed with the defendant that the words “pay and display” were not legible from his car and that the impression given by the sign to a driver entering the car park was that the car park was free. As a result, the terms and conditions of entry had not been drawn sufficiently to the attention of the defendant.

Bringing contractual terms to the attention of the other party

Terms and conditions which are immediately visible to the other contracting party will form part of the relevant contract, for example, where they are set out in a written agreement, however long or complicated the agreement might be. There is usually no obligation on a party to draw to the attention of a signatory any terms which are unusual or burdensome. In L’Estrange v F Graucob Ltd [1934] 2 KB 394, Scrutton LJ said:

”When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.” (At page 403.)

Terms and conditions which are not immediately visible to the other contracting party will be effectively incorporated into the relevant contract as long as reasonable steps are taken to bring the existence of the terms and conditions to the notice of the other party before the transaction is concluded (see, for example, Parker v SE Railway [1877] 2 CPD and Alexander v Railway Exec [1951] 2 KB 882).

Incorporating an unusual and onerous term

The more burdensome or unusual the terms and conditions, the more clearly they should be drawn to the attention of the other party...

Thus there is a clear principle that, where there is a contractual provision which is particularly unusual or onerous, but not immediately visible (for example, where terms are incorporated by reference), a party will not be able to rely on the clause unless it has done enough to bring the clause fairly to the attention of the other party. But in addition, it has been argued that, in some cases, unusual or burdensome terms set out in a contract which is about to be signed should also be brought to the attention of the signatory:

For a convenient summary of the case law on these issues, see One World v Elite Mobile, at paragraph 50.

Can parties be bound by terms which did not exist at the time of contract formation?

In Stonard v Green Shoots Capital UK Ltd [2021] EWHC 927 (Ch) (16 April 2021), Mr Hugh Sim QC, sitting as a deputy judge of the High Court, reviewed some of the authorities on this question, at paragraph 109:

”Green Shoots was unable to find any authority in support of the proposition that parties could agree to be bound by terms which did not exist at the time the contract was entered into by them. This raises an interesting question as to whether this is conceptually possible. I am tentatively inclined to the view, though I do not decide, that it may be possible if there is a sufficiently certain way in which such terms can be machined without requiring further agreement. I note that it is possible for a party to agree to give one side a discretion to set those terms and the court may respect this; see the decision of the Privy Council in Sunkersette Obu v A Strauss & Co Ltd [1951] AC 243, where the basis and rate of commission was left to the discretion of the principal. Thus, for example, parties would be competent to agree to incorporate terms which were to be produced in the future by one of them under a discretion conferred on them. I also note in Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214, Lord Hoffmann rejected the notion that it was conceptually impossible for a bank to grant a charge over sums owed by a customer to a bank. The courts are generally willing to permit the parties freedom of contract in a commercial setting, and drafting ingenuity should not be underestimated.”

On the facts, the judge decided that the parties did not agree that they would be bound by a document to be created in the future.

Judicial comments in Green v Petfre suggest a number of practices that should be adopted to increase the likelihood that website terms will be incorporated into contracts with website users:

Keep the website terms as short and simple as possible.
Highlight unusual or important terms (Lord Denning’s “red hand” principle) by putting them at the top of the terms and conditions, and using capitals or other techniques such as boxes and bold type. Confine highlighting techniques such as capitals to really key terms, otherwise their effect is diminished.
Ideally, the website user should be obliged to scroll through the terms and conditions before having the opportunity to accept or reject them. However, key terms should not be placed at the end of the terms and conditions.
The consent of the website user should be refreshed each time he or she enters into a website contract. Acceptance communicated years previously might be considered irrelevant.

In Blu-Sky Solutions Ltd v Be Caring Ltd [2021] EWHC 2619 (Comm) (30 September 2021), His Honour Judge Stephen Davies, sitting as a judge of the High Court, accepted the following as a correct statement of the law when considering a B2B dispute:

”It is common ground that where, as here, the T&Cs are not contained in the contract signed by the accepting party, but are referred to in the signed contract, the question is whether those T&Cs were sufficiently brought to the attention of that party. Both parties also referred me to the decision of Teare J in Impala Warehousing and Logistics (Shanghai) Co. Ltd v Wanxiang Resources (Singapore) PTE Ltd [2015] EWHC 25 (Comm) for the propositions that: (a) in modern times, when standard terms are frequently to be found on websites, reference to the website in a contractual document may well be a sufficient incorporation of the standard terms to be found on that website; (b) where the website contains reference to more than one set of T&Cs, the T&Cs which the party relying on them seeks to rely upon must have been those which were clearly applicable to the contract being entered into (in that case the distinction was between warehousing terms and freight terms).” (at paragraph 89)

Other materials

For other useful material on incorporation of terms, see:

Practice points: offer

Much of the classic case law relating to the formation of contracts arises out of situations where no single comprehensive document was drawn up, and no lawyers were involved. Many of the problems illustrated by the cases would have disappeared if the parties had set out their agreement in a single document.

The following points illustrate the practical application of the principles outlined above. They can serve as brief reminders to lawyers and contract managers who have the opportunity to influence the contractual process, either in particular situations or when setting up a procedure to be followed. Of course, they do not apply to all situations:

Set out the entire understanding of the parties in a single document with appropriate “entire agreement” and other boiler plate clauses, incorporating any other documents by reference, or as schedules. This may be obvious to a lawyer, but less so to a sales team.
Unless you are processing transactions on standard terms and want to facilitate acceptance, avoid sending out offers which are capable of acceptance. Instead, send out an invitation to negotiate, and wait for the other party to come back with an offer or counter-offer, thus giving you the option to accept or not.
Avoid sending out signed agreements for the other party to sign. Send out a blank agreement, ask the other party to return a signed copy, and then send back the fully signed version. In this way you have greater control over the contractual process.
Maintain a discipline which requires all correspondence to be marked “subject to contract”, with wording which makes it clear that communications are invitations to treat, and that no contract is made until your company’s formal order acceptance has been sent (but see Documents labelled “subject to contract”). (The terms of internet retailers such as supermarkets often state that an order is not accepted until the goods are despatched. This avoids the retailer being bound to supply items which are out of stock.)
If you don’t want to use words such as “subject to contract” or “invitation to treat”, use ordinary language which conveys a similar intention, such as “This price list is intended to give an indication of recent pricing. Please contact us for a written estimate”.
Bear in mind that a combination of documents, for example, a price list accompanied by standard terms and conditions, both in one envelope, or attached to one email, may give rise to an intention to create legal relations (see Intention to create legal relations).
Make sure that the other party has at least the opportunity to read your terms and conditions of sale before the offer and acceptance process begins. Ideally your customer then makes the offer, and you have the option to accept it or not.
Check that your standard terms are in fact included in your standard contracting procedures. For example, be careful that staff are not omitting from emails and fax pages the reverse of a scanned hard copy document that contains your standard terms and conditions (see Legal update, Sale of goods: battle of the forms, dealing with Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC)), also Phoenix Interior Design Ltd v Henley Homes Plc & Anor [2021] EWHC 1573 .
If you do send out a binding offer, state expressly when the offer expires.
Consider whether your offer should specify a particular manner of acceptance.

Acceptance

In almost all cases, a binding contract is formed only if an offer is accepted. The time when, and the place where, an offer is accepted will determine the moment at which the contract becomes legally binding, and often the jurisdiction in which the contract has been made. In the absence of express provisions, the latter question may be important in determining the governing law of the contract and the correct jurisdiction for any litigation connected with it.

For a discussion of the cases when the courts have departed from a classic offer and acceptance approach to contract formation, see Contracts arising other than via offer and acceptance.

What amounts to acceptance?

Acceptance is final and unqualified assent to an offer. It is made in response to an offer and to be effective in creating an enforceable contract it must correspond exactly with the terms of the offer with no variation of the terms.

Acceptance by conduct

It is generally the case that acceptance must be communicated to the offeror to be effective, although sometimes conduct will be considered as acceptance, for example, where a supplier does not communicate acceptance of an order, but it delivers the goods ordered and requests payment.

However, conduct will only amount to acceptance of an offer if it is clear that the party did the act in question with the intention of accepting the offer.

Acceptance or counter-offer?

If an offeree purports to accept an offer but the acceptance does not match the terms of the offer (disregarding trivial variations) then no contract is formed at that point. Rather than accepting the original offer, the offeree makes a counter-offer.

A counter-offer amounts to a rejection of the original offer so that no contract exists (Hyde v Wrench (1840) 3 Beav 334) and it amounts to a new offer from the offeree that the original offeror can choose to accept. A counter-offer must be distinguished from an offeree’s request for further information (on receipt of an offer). This does not amount to a counter-offer (Stevenson v McLean (1880) 5 QBD 346).

Communication of acceptance

Acceptance must be communicated

The general rule is that an acceptance has no effect until it is communicated to the offeror. This is the point at which the contract comes into being.

When does the communication of acceptance take place?

There are two main rules as to when acceptance is communicated:

The reception rule, that is, the contract will be formed once the acceptance is received by the offeror. This applies to relatively instantaneous forms of communication such as telephone calls and telexes
The postal rule which applies to delayed forms of communication with the effect that acceptances are deemed to be effective at the time of sending, provided the offeree correctly addresses and stamps the letter.

It is sometimes forgotten that the postal rule applies only to the acceptance of offers. Chitty on Contracts, Vol 1, (Sweet & Maxwell, 34th ed, 2021), at paragraph 4-124, states (without specific authority) that:

”A rejection takes effect when it is communicated to the offeree. There is no reason to apply the posting rule here; the offeree will not act in reliance on posting his rejection as he derives no rights or liabilities from it; and the offeror will not know that he is free from the offer until the rejection is actually communicated to him.”

Avoiding the postal rule

The postal rule can cause problems as the contract may be formed at a time when the letter of acceptance has not found its way to the offeror. This is the position even if the letter is delayed or lost in the post. If an offer specifies how and when acceptance is made, this will trump both these rules. If possible, therefore, it is best to provide for the method and timing of acceptance in the terms of the offer to avoid the postal rule (see Specifying manner of acceptance).

Acceptance of offers by email

Contracts made by email or on a website are dealt with under the heading Electronic contracts and signatures, but it is convenient to discuss here the question of the acceptance of offers by email. It is clear that contracts can be formed by email. However, no definite statutory or common law rules have been formulated to deal with the question of the precise time that an offer is accepted, if acceptance is by email. Either the postal rule or the reception rule could be applicable, because, although email communications can be relatively instantaneous, there can also be delay. The Law Commission indicated some years ago that it would be desirable to have legislation on this matter, and its initial view was that the transmission process is complete when the communication reaches the recipient’s internet service provider (paragraph 3.6(1), Law Commission: E-Commerce: formal requirements in commercial transactions).

Specifying manner of acceptance

If the offeror prescribes a method then the offeree must use that method to accept. Any attempt to accept in another way will amount to a counter-offer (Western Electric Ltd v Welsh Development Agency [1983] QB 796) (see Acceptance or counter-offer?).

This rule may be relaxed where, for example, an offeror specifies a manner for acceptance but does not make it clear that only acceptance in that manner is binding. If the offeree uses a method of communication that is no less advantageous (from the offeror’s point of view) than the method prescribed, then a contract is concluded (Tinn v Hoffman & Co (1873) 29 LT 271

Consideration

Contract law is based on the notion of reciprocity, that is, a promisee cannot enforce a promise unless it has given or promised something in exchange for it. The legal term for that “something” is consideration. The most obvious example of an agreement that is not supported by consideration, and therefore unenforceable, is an agreement to make a gift, that is, an agreement to provide a benefit with no act or omission being required of the recipient.

Key concepts relating to consideration

Consideration does not need to be adequate

The law is not concerned with the adequacy of consideration and it will not interfere with the bargain between the parties. However, consideration must have some value in the eyes of the law, even if it is not adequate. The parties can decide what consideration they want; in the past, a peppercorn was considered to provide adequate nominal consideration, and could fulfil the same function today. The more common contemporary equivalent is usually the sum of one pound.

Consideration must move from the promisee

This means that the person who seeks to enforce a promise must have provided consideration (see Tweddle v Atkinson (1861) 1 B & S 393). This is related to the doctrine of privity of contract, the common law rule (which can now be modified by the parties) that only a party to a contract can enforce rights under it. For more information, see Practice note, Contracts: privity and third party rights and obligations.

Consideration does not need to be intentional

Although a contracting party will usually be aware of what consideration it is giving for the promise it is accepting, it is not necessary for there to have been conscious thought about what is being given by way of consideration in a contract, provided that there is consideration.

Consideration is not needed if the contract is executed as a deed

If a contract lacks consideration, whether actual or nominal, it will only be enforceable if it is made as a deed, a written document whose signature involves certain limited formalities (see When must a written contract be executed as a deed?). For more information about deeds, see Practice note, Execution of deeds and documents.

Executed and executory consideration

A distinction is often drawn between executed and executory consideration:

Executed consideration. This is found where the promisor asks for something in exchange for the promise and the promisee provides consideration by giving the promisor what has been requested. For example, Mrs Carlill’s use of the smokeball provided the consideration which enabled her to enforce the promise of the Carbolic Smoke Ball Co. to pay £100 for anyone who used it and yet caught influenza (Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256).
Executory consideration. This is deemed to exist where the parties exchange promises, for example, where one party promises to deliver goods in two weeks’ time and the other party promises to pay for them within 30 days of invoice. In the Carlill case, the promise by the Carbolic Smoke Ball Co. to pay the £100 amounted to executory consideration.

Past consideration is usually no consideration

As a general rule, past consideration is no consideration. If a party performs an act which is merely discharging a pre-existing obligation, that does not constitute consideration for a new obligation.

The issue often arises when parties try to amend or vary a contract (see Practice note, Contracts: variation).

Practice point: consideration

What should you do if you have any doubt about the existence of consideration?

As mentioned above, the courts are quick to find consideration for an enforceable contract in commercial situations. However, there may be doubt in some circumstances, for example, where a party agrees to amend an agreement when there is no advantage to that party. In fast moving commercial situations, there is little point in spending too much time considering the finer points of the doctrine of consideration. The practical solution is to do one of the following:

Acknowledge in the written agreement the existence of some token consideration, for example, the payment of one pound.
Execute the agreement as a deed.

Intention to create legal relations

A contract cannot be made without a mutual intention to create a legally binding arrangement. Where no such intention can be attributed to the parties, there is no contract. However, an intention to create legal relations is presumed in commercial situations (see Presumption in commercial circumstances).

Presumption in commercial circumstances

In commercial circumstances there is a rebuttable presumption that the parties intend their agreement to be legally binding. If a party wishes to rebut this presumption, it will have to produce clear evidence to that effect.

A distinction can be drawn between two different situations:

The situation where the issue between the parties is whether or not there was ever an intention that a certain document or negotiation should give rise to legal relations. For example, the provider of a letter of comfort would take the position that it was never its intention that the document should give rise to legally enforceable rights and duties.
The situation where the parties envisaged or hoped that they would enter into legal relations, but one of them takes the position that there was no intention to create legal relations at a particular point in time, usually because, at that point in time, there remained outstanding matters to be agreed.

In the second situation the concept of intention to create legal relations can become blurred with the concept of certainty, that is, one of the parties might allege that there was no intention to create legal relations because there was never complete agreement.

”In a commercial context, the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it and it is a heavy one”.

For more recent reminders of the approach of the English courts to the issue of intention to create legal relations, see:

Practice points: intention to create legal relations

As with all formation issues, best practice can vary depending on the goals of the negotiating party. Sometimes vagueness can be in the interests of one of the parties. Most businesses, however, seek certainty in their legal relations:

Whatever you call your document, make clear whether the agreement is intended to be binding or not. If some parts are intended to be binding and others not binding, state this clearly. This can be done simply by dividing an agreement into two parts, with the statement that Part A is intended to be legally effective, and Part B is not intended to be legally effective. The part that is not intended to be legally effective might include the party’s wish to enter into a binding contract, the premise being that no binding contract should be created until a separate more formal agreement is signed. The effective part might include confidentiality provisions, apportionment of the costs of negotiation or the preparation of a joint tender, and so on.
Try to see whether you can call your agreement (or non-agreement) something more meaningful to your business clients than “letter of intent” or “heads of terms”, both of which are ambiguous, particularly to non-lawyers (see Problem documents). But remember that the label on a document is just one factor that the court will consider in deciding whether there is an intention to create legal relations.

Certainty of terms

Incomplete and uncertain agreements

As noted, “unless all the material terms of a contract are agreed, there is no binding obligation” (Maugham LJ in Foley v Classique Coaches Ltd [1934] 2 KB 1). Parties must ensure that:

Their agreement is complete, that is, not lacking in some essential term.
Their agreement is not otherwise uncertain, for example, vague or ambiguous.

If an agreement is incomplete or otherwise uncertain, a court may not be able to enforce it, despite the court being willing to honour an apparent intention of the parties to enter into legal relations. Scammell v Ouston [1941] AC 251 involved an agreement for purchase “on hire-purchase terms”. It was held that, because there were many kinds of hire-purchase agreements on widely different terms, the expression was too vague to enable any definite agreement to be ascribed to the parties.

General obligation to use best endeavours can give rise to more specific obligations

Issues to do with uncertainty can arise in connection with obligations to use best endeavours (see Practice note, Best or reasonable endeavours?).

In Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417, the Court of Appeal held that an obligation on an airport operator to use best endeavours to promote an airline’s low-cost services gave rise to a more specific obligation on the airport operator to accept arrivals and departures of flights outside the airport’s opening hours. Even though the contract did not say anything about operating hours, and even though the airport operator would make a loss as a result, such an approach to the best endeavours clause was supported by the pre-contract understandings of the parties. Lewison LJ (dissenting) considered that the object of the best endeavours obligation was too vague to be enforceable (see Legal update, Court of Appeal considers “best” and “all reasonable endeavours” clauses).

Difficulty in implementation not necessarily a bar to enforcement

A contract that is difficult to implement is not necessarily void for uncertainty (Scammell v Dicker [2005] EWCA Civ 405). In that case, the Court of Appeal held that an agreement to settle a boundary dispute, which was embodied in a court order, was not void for uncertainty because it was difficult to implement. One of the reasons why the order was difficult to implement was that the plan referred to in the order showed the boundary line with a thick line that was equivalent to some three feet on the ground. But the court held that, although it was difficult to identify the precise line of the boundary on the ground according to the consent order and the consent order plan, it was neither practically nor legally impossible to do so with sufficient accuracy at least to implement the parties’ intention to compromise the litigation (see Legal update, A contract that is difficult to implement is not void for uncertainty).

Obligation to negotiate not normally enforceable

The cases in this area also turn very much on the particular facts. The principal question is whether or not an obligation to negotiate, or an obligation to “negotiate in good faith”, can somehow give rise to binding obligations, given the fact that implicit within the expression itself is the notion that the parties have not yet finished their negotiations, therefore are not yet agreed. The cases suggest that an obligation to negotiate is not normally enforceable (see Courtney & Fairbairn v Tolaini Brothers (Hotels) Ltd and another [1975] 1 WLR 297 and Walford v Miles [1992] AC 128). However, in some circumstances the courts may hold that the parties ought to have made a real effort to negotiate.

However, in the case of Petromec Inc and others v Petroleo Brasileiro SA and others [2005] EWCA Civ 891, the Court of Appeal held that an obligation to negotiate in good faith may be enforceable in the following circumstances:

The obligation to negotiate is part of a contractually binding agreement.
The obligation to negotiate in good faith is express rather than implied.
The matter to be negotiated is capable of objective assessment by a third party.

Petromec has been followed in Butters and others v BBC Worldwide Ltd and others [2009] EWHC 1954, which involved an obligation to negotiate a replacement for an unenforceable contractual provision.

Multiple issues in contract formation cases

Disputes about whether an enforceable contract has been agreed often involve overlapping issues, for example:

Questions of whether or not an offer has been accepted may be mixed up with questions of whether or not there was an intention to create legal relations at particular key moments (see Intention to create legal relations).
Questions of whether or not the terms of the alleged contract are sufficiently complete and certain to be enforced (see Certainty of terms) may be mixed up with questions of intention to create legal relations. If major matters have not been agreed by a certain point, a court might conclude, not just that any agreement reached was too uncertain to be enforced, but also that this uncertainty demonstrates that one or both of the parties had no intention of entering into an enforceable legal contract at that point.
Where a contract has been created, questions of whether or not particular terms have been incorporated (see Incorporating terms into a contract and Incorporating terms into a contract: battle of the forms).

In the next section, we consider situations and cases involving multiple contract formation issues, all in the context of suppliers starting performance apparently before agreement has been reached on all the terms of the contract, a situation which also gives rise to doubt as to whether or not either or both of the parties had an intention to enter into legal relations on that basis.

These themes are continued in the section after that, when we consider what may be referred to as “problem” documents:

Letters of comfort.
Pre-contract documents such as letters of intent, memoranda of understanding, heads of agreement, and heads of terms.
Documents labelled “subject to contract”.

The common factor with these “problem” documents is that their label and content can give rise to doubt about:

Whether the parties intended to enter into legal relations,
Whether or not there was sufficient agreement on terms to satisfy the contractual requirement of certainty.

Finding that contract exists

The facts in G Percy Trentham Ltd v Archital Luxfer [1993] 1 Lloyds Rep 25 involved the supply and installation by a subcontractor of windows for industrial units. The parties had not executed written subcontracts for the works, which were in two phases, but there were oral and written exchanges between the parties before performance of the subcontracts, including references to each party’s standard terms. The customer paid for the work. The contractor sued the subcontractor for various breaches of contract, alleging defects and delays, but the subcontractor argued that there were no subcontracts to breach. However, the Court of Appeal agreed with the judge that there was evidence to justify a finding that there were contracts, evidenced by correspondence and concluded partly by conduct. The case is notable for the remarks by Steyn LJ:

”The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential. In this case fully executed transactions are under consideration. Clearly, similar considerations may sometimes be relevant in partly executed transactions ...”

Finding that no contract exists

The fact that performance has begun does not always lead to the conclusion that a contract exists.

In British Steel v Cleveland Bridge (1984) 1 All ER 504, the question was whether or not there was a binding contract covering the supply of steel nodes which had in fact been delivered. Cleveland contended that there was such a contract, which was to be found in certain documents (including a letter of intent issued by Cleveland) and the conduct of British Steel in proceeding with the manufacture of the nodes. British Steel’s primary contention was that no binding contract was ever entered into, but that they were entitled to be paid a reasonable sum for the nodes on a quantum meruit basis. As in similar cases, the motives of the parties in putting their cases in these different ways lay primarily in the fact that, unless there was a binding contract between the parties, there was no legal basis for a counterclaim by the customer for damages in respect of late delivery or delivery out of sequence.

Robert Goff J concluded that, despite the fact the parties had begun performance, no contract had arisen. Both parties confidently expected a formal contract to eventuate. In order to move matters along, Cleveland had requested British Steel to begin the contract work, and British Steel had complied with that request.

If a contract had been signed, the work done as requested would have been treated as having been performed under that contract. However, if no contract was entered into, then the performance of the work was not referable to any contract the terms of which could be ascertained. In the latter case, the judge held that the law should simply impose an obligation on the party who made the request to pay a reasonable sum for such work as had been done pursuant to that request. Such an obligation had its basis in restitution, rather than contract.

Problem documents

Whether an enforceable contract has been created arises frequently in connection with certain types of document:

Letters of comfort.
Pre-contract documents such as letters of intent, memoranda of understanding, heads of agreement, and heads of terms.
Letters, emails, draft agreements and other documents which are marked “subject to contract”.

These three types of document are considered below.

The titles or labels used in the documents considered in this section do not have conclusive effect, and do not refer to clear legal categories, independent of the law of contract. Issues arising out of such documents tend to overlap, for example, a letter of intent will often be marked “subject to contract”. The common factors here are that the label on the document and/or the words used give rise to doubt as to whether:

There has been an intention to create legal relations.
The parties have reached agreement on all the key terms, in which case a court might be asked to consider whether the document under consideration is sufficiently certain to amount to an enforceable agreement (see Certainty of terms).

Letters of comfort

Definition and purpose

Letters of comfort are often used in loan finance transactions, when they are issued by third parties to banks in relation to loans. For example, a parent company may give a comfort letter to the bank for a loan to its subsidiary. In a more general commercial context, the parent may give a comfort letter to a customer of a subsidiary, if the customer considers that the small size of the subsidiary or its recent incorporation creates doubts about its ability to discharge obligations to the customer under a supply contract.

Usually the intent in issuing a letter of comfort, and labelling it as such, is that the letter should not constitute a guarantee or undertaking enforceable against the issuer. The aim is normally just to provide encouragement or comfort for the bank or the customer to proceed with the transaction. There could be a number of different reasons for this, for example, that the parent company does not want a large number of contingent guarantee liabilities showing up in its accounts.

In the context of this practice note, the crucial feature of a comfort letter is whether there is an intention to create legally binding obligations on the parent company. Both beneficiaries and providers of comfort letters must understand the fundamental difference in the nature of the obligations provided by a guarantee, a binding comfort letter and a non-binding comfort letter. For a discussion of the issues relating to guarantees, see Practice notes, Guarantees and indemnities and Bonds, guarantees and standby credits: overview: Comfort letters.

Title, label and text of document

The title or label given to the document will not prevent the courts from giving effect to the meaning of the words used. So if, on their proper interpretation, the words used amount to a promise, and if (apart from the label) it appears that the parties intended to create legal relations, the issuer of a letter of comfort may be liable to make good the recipient.

As we have seen, it is for the issuer of the letter to show that there was no intention to create legal relations (this follows from Edwards v Skyways Ltd [1964] 1 WLR 349).

The wording of a comfort letter might be along the following lines:

”We refer to ABC (the transaction) involving our wholly-owned subsidiary, XYZ.

It is our present policy to ensure that XYZ is managed so that it:

(a) maintains adequate financial resources; and

(b) is in a position to meet its obligations to you in respect of the transaction.

This statement is intended to be a statement of our present policy only and accordingly shall not be construed as constituting a promise, guarantee or warranty as to future conduct or imposing on us any obligation to give you notice of any future change in policy.

Nothing expressed or implied in this letter is intended to create legal relations between us.”

A comfort letter forming part of a loan transaction may state that the parent company’s policy is to ensure that its subsidiaries are “always in a position to meet their liabilities under the loan facility” with the bank (Kleinwort Benson v Malaysia Mining Corp Sdn Bhd [1989] 1 All ER 785; Re Atlantic Computers plc (in administration): National Australia Bank Ltd v Soden and another [1995] BCC 696).

Legal effect

There have been numerous disputes about whether letters of comfort can have contractual effect enabling the bank to sue the parent company for the subsidiary’s default. As the letters arise in a commercial context, there is a presumption of contractual intention. However, in the Kleinwort Benson case, the court said that it is a matter of interpretation in the light of the relevant surrounding circumstances to decide whether the letter constitutes a contractual promise as to the future policy or intentions of the parent.

In practice, to rebut the presumption of contractual intention in commercial situations, it is advisable to state expressly which parts of the document are intended to be legally binding (it might be some boilerplate paragraphs dealing with governing law), and which parts are not intended to have legal effect (usually the main comfort statement). However, if there are no clear statements about which parts of the comfort letter are to be legally binding, boilerplate language should be avoided, as it may give the impression that there is an intention to create legal relations.

If a letter of comfort is found to be legally binding it will not give rise to a claim for a liquidated sum (unlike a guarantee). Instead, the claim will be for breach of contract, giving rise to a right to damages and a duty on the lender to mitigate its loss.

Changes in intentions or policy

If the issuer revokes any intentions as stated in a letter of comfort or similar document, then liability will depend on the terms of the letter and the circumstances in which it is given. There may be an express or implied commitment not to revoke the stated intentions, which may amount to a continuing representation. If the comfort letter only contains general policy statements, then the issuer is free to change its policy.

Letter of intent. The label “letter of intent” can be ambiguous or confusing, particularly to non-lawyers. To one party the term might suggest a mere intention to do something, the precise nature of which has not yet been defined. However, another party might be left with the impression that what is set out in the letter of intent is what the first party actually intends to do, in other words, that there is an intent to create legal relations. Here is an example of wording from a letter of intent:
”It is our intention to enter into a subcontract with you to carry out earthworks operations on the above scheme. The price will be based on earthworks operations on the above scheme. The price will be based on your quotation of 17 December 1992 and discussions at our Retford office with your Messrs. Clarke/Booth on Thursday 7th January, 1993. Programme, as discussed at the meeting, is to commence with stripping of vegetation on Friday 8th January 1993 and be completed in line with our attached programme C9248-1. Full documentation will follow in due course.”
Although this wording did not in itself create an enforceable contract, the court found that a subcontract existed, having taken into account all communications and circumstances between the parties following the letter of intent (see VHE Construction Plc v Alfred McAlpine Construction Ltd [1997] EWHC Technology 370).
Memorandum of understanding. The expression “memorandum of understanding” has a connotation of ambiguity or uncertainty, a sense conveyed by the words “this was just our understanding of what we want to happen, to record where we are in our negotiations, but we had not yet converted this understanding into a binding contract”. There may be a sense that more precision and additional material may be required for the binding contract.
Heads of agreement, term sheets and heads of terms. The expressions “heads of agreement”, “term sheets”, and “heads of terms” also imply some sort of summary of the progress made towards reaching agreement, rather than a detailed final agreement.

As before, the wording in the body of the pre-contract document should be clear as to which provisions of the document, if any, are intended to have legal effect.

Legal effect

The legal effect of a pre-contract document depends on whether, on a proper interpretation of the document, and applying the contract formation principles set out in this practice note, an enforceable contract has been created.

”Letters of intent are typically sent where the parties are not in a position to enter into a projected contract towards which they may have been working, but the employer instructs the contractor to take certain steps that would be included in their projected contract if it had been concluded (whether by executing formal contract documents or otherwise). It is well established that the issuing of an instruction by a letter of intent is itself capable of giving rise to a contract, which is separate from the projected contract.

Documents labelled “subject to contract”

Definition and purpose

The expression “subject to contract” can be used as a heading or label or within the body of any letter, email or other document which forms part of an exchange of correspondence. It is also a label which is put on the front page of a draft agreement before it is circulated to the prospective parties.

The use of the phrase “subject to contract” can be helpful in rebutting the presumption of contractual intent in commercial situations. It is usually taken to mean that the parties have not yet reached agreement and are still in the process of negotiation, or that the agreement the parties have reached is not to be binding until it is signed.

Oral contracts

A contract may be wholly oral, wholly written, or a mixture of the two.

Establishing the terms of an oral contract

Although there is no doubt that oral contracts are legally enforceable, it is always desirable to record in a document (or other written retrievable format) terms which have been agreed orally. This is because oral evidence can always be contradicted by other oral evidence. Bearing in mind that the burden of proof in civil cases is simply on the balance of probabilities, uncertainty will always surround a claim or defence which is dependent on oral evidence.

The position here has been affected by the increasing use of emails, texts, and other forms of digital communication, to the extent the Leggat J has commented, in Blue v Ashley [2017] EWHC 1928 (Comm), 26 July 2017, at paragraph 65, that:

”It is rare in modern commercial litigation to encounter a claim, particularly a claim for millions of pounds, based on an agreement which is not only said to have been made purely by word of mouth but of which there is no contemporaneous documentary record of any kind. In the twenty-first century the prevalence of emails, text messages and other forms of electronic communication is such that most agreements or discussions which are of legal significance, even if not embodied in writing, leave some form of electronic footprint.”

Oral contracts and contracts which are partly written and partly oral

Where the contract is an oral contract or a contract that the parties intend to be partly written and partly oral, all statements made will have to be examined to decide whether or not they are terms of the contract or merely representations.

Does an unsigned written contract have any legal effect or evidential value?

Normal rule

The fact that the parties have not signed an agreement will be only one factor for the courts to consider when deciding whether or not the parties intended to be bound by the document in question. Normally the lack of a signature would suggest that the parties had not yet arrived at the point where they wished to be bound, but the courts will look at all the evidence relating to the intention of the parties, including their conduct. As Longmore LJ said in Investec Bank (UK) Ltd v Zulman and another [2010] EWCA Civ 536:

”It is a question, in every case where a written agreement is contemplated, whether the parties intend not to be bound until the relevant document is actually signed, or merely intend that the relevant document is to be the record of an agreement made orally and intended to be binding when made.” (At paragraph 16.)

Unsigned written agreement can evidence terms of binding contract

As we have seen (see Starting performance before reaching full agreement), the normal rule will not apply if the court finds on the facts that the parties have subsequently changed their minds, and intend to be contractually bound before execution of the document.

The classic case in this area is Brogden v Metropolitan Railway [1877] 2 App Case 666. The House of Lords concluded that, in a situation where the parties had acted in accordance with an unsigned draft agreement for the delivery of consignments of coal, there was a contract on the basis of that draft.

The form of a contract

As we have seen, contracts may be written, or oral, or partly written and partly oral.

However, in some cases, to be legally enforceable:

A limited number of contracts may need to be in writing (see When must a contract be in writing?).
An even smaller number of contracts must not only be in writing, but also must be “made by deed” (that is, a written document that is executed in accordance with particular formalities) (see When must a written contract be executed as a deed?).

When must a contract be in writing?

There are situations where a written contract is required by law or in order to fulfil some registration requirement. Common examples are:

The assignment of the benefit of contractual rights (section 136, Law of Property Act 1925).
A contract for the sale of land, an equitable charge or a mortgage of a legal estate in land (section 2, Law of Property (Miscellaneous Provisions) Act 1989). In Neocleous v Rees [2019] EWHC 2462 (Ch), the Manchester County Court found that an automatically generated email footer containing the name and contact details of the sender constituted a signature for the purposes of section 2(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (see Legal update: Electronic signatures: contract for the sale of land (County Court)).
An assent to the vesting of a legal interest in land (section 36(4), Administration of Estates Act 1925).
A transfer of shares (section 770, Companies Act 2006). An exception to this concerns listed companies whose shares are admitted to CREST where the shareholder holds the shares in uncertificated form. In this case, share transfers can be effected electronically and do not require written transfers (sections 783, 784(3), 785 and 788, Companies Act 2006 and Uncertificated Securities Regulations 2001 (SI 2001/3755).
Assignment of a number of intellectual property rights (sections 90(3) and 222(3), Copyright Designs and Patents Act 1988).
Guarantees (section 4, Statute of Frauds 1677). In Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another [2011] EWHC 56, the High Court considered whether it was arguable that an email chain could constitute a guarantee for the purposes of the Statute of Frauds 1677. The case applied existing law to a specific set of facts but is a reminder of the need for caution in pre-contract negotiations that binding obligations are not unwittingly formed by a sequence of emails (or other documents), the language used, or the convention of the transaction.
An agreement whereby a current or former employee or worker agrees to waive or settle a claim (or more usually, all possible claims) against the employer in return for a Section 203 of the Employment Rights Act 1996 sets out certain conditions for a settlement agreement to be valid under English law, and these include the requirement that the agreement be in writing. There are corresponding provisions in other employment statutes.
Some documents may need to be in hard copy form with “ink signatures” for other reasons, for example, documents that need to be notarised.

For further details on contracts which must be in writing, see Practice note, Execution of deeds and documents, in particular When do you need a written contract?.

Electronic contracts and signatures

Contracts can be made by various forms of electronic communication, including email, website order and acceptance procedures, and text messages.

Traditional law of contract applies to electronic communications

The general rule under English law is that a contract does not need to be in any particular form in order to be legally binding.

The English common law of contract is founded on what might be described as high-level concepts: “offer”, “acceptance”, “intention to create legal relations”, “consideration” and “certainty”. The logic does not depend on any particular technology. This allows for contracts to be made, not only orally or in writing, but also by other means. For example, it was held almost 70 years ago that contracts can be made and evidenced by telex (Entores v Miles Far East Corp [1955] 2 QB 327).

Thus the three questions which need to be asked when analysing whether a contract has been made by digital communications are the same as for traditional means of communication:

Are the key contractual elements present?
Is any particular form required by statute?
In the case of variations, is any particular form required by contract?

Are the key contractual elements present in an email or website transaction?

So the first question to consider when deciding whether or not a contract has been made by electronic means is whether or not the key elements mentioned above are all present in the communications which have been exchanged.

Formation of contracts by email

Although there has never been any precise authority on the issue, the courts have simply assumed that contracts can be made and notices given by email, and have gone on to consider other issues, such as whether or not a contract has been formed under ordinary principles (see Article, Formation of contract by email), or whether or not an enforceable guarantee can be given by email (see Legal update, High Court considers enforceability of guarantee offered by email).

In Bernuth Lines Ltd v High Seas Shipping Ltd [2005] EWHC 3020, the High Court was required to consider various issues relating to the service of a notice of arbitration by email, so the case was not about contract formation, but Christopher Clarke J made the point that “there is no reason why, in this context, delivery of a document by email – a method habitually used by businessmen, lawyers and civil servants – should be regarded as essentially different from communication by post, fax or telex”.

Another case on service of notice of arbitration is also of some indirect relevance to the formation of contracts by email, and that is Glencore Agriculture BV v Conqueror Holdings Ltd [2017] EWHC 2893 (Comm), discussed in Legal update, Arbitration notice emailed to junior employee was not served effectively. In that case, the High Court set aside an arbitration award because the notice commencing arbitration was emailed to a junior employee who was not authorised to accept service. However, the key issue was whether the employee was authorised to accept service, not the fact that the notice was served by email. On the evidence, the employee had no such actual, implied or ostensible authority. The decision provides a reminder that all the normal principles of contract law and agency apply to dealings by email. An email exchange involving a junior employee might not be sufficent to create a contract, due to the fact that the junior employee had no authority to enter into contractual relations on behalf of the employer. The case is worth bearing in mind because the ease of email can mean that communications may be exchanged with employees who may not have authority to conclude contracts.

For a discussion on the timing of acceptance of offers by email, see Case law on acceptance by email.

Formation of contracts via a website

Website contracting procedures fall easily within the traditional offer and acceptance analysis.

. For example:

A website must make clear what are the technical steps necessary to conclude a contract online, whether or not the concluded contract will be filed by the service provider and whether or not it will be accessible, and the manner in which errors in placing an order can be corrected.
Contract terms must be made available in a way that allows the consumer to store and reproduce them.
Orders must be acknowledged without undue delay and by electronic means.
The service recipient must be able to identify and correct input errors before placing the order.
The order and the acknowledgment of receipt will be deemed to be received when the parties to whom they are addressed are able to access them.

(Articles 10 and 11, E-Commerce Directive.)

The report includes a statement which sets out the high-level conclusions of the Law Commission as to the law regarding the validity of electronic signatures. This includes:

An electronic signature is capable in law of being used to execute a document (including a deed) provided that the person signing the document intends to authenticate the document and any execution formalities are satisfied.
An electronic signature is admissible in evidence in legal proceedings. It is admissible, for example, to prove or disprove the identity of a signatory and/or the signatory’s intention to authenticate the document.
Save where the contrary is provided for in relevant legislation or contractual arrangements, or where case law specific to the document in question leads to a contrary conclusion, the common law adopts a pragmatic approach and does not prescribe any particular form or type of signature. In determining whether the method of signature adopted demonstrates an authenticating intention the courts adopt an objective approach considering all of the surrounding circumstances. Examples are given of non-electronic forms that the courts have held to amount to valid signatures and it states that electronic equivalents of these non-electronic forms of signature are likely to be recognised by a court as legally valid. Examples are also given of electronic forms that the courts have held amount to valid signatures in the case of statutory obligations to provide a signature where the statute is silent as to whether an electronic signature is acceptable.
The Law Commission’s view is that the requirement under the current law that a deed must be signed “in the presence of a witness” requires the physical presence of that witness. This is the case even where both the person executing the deed and the witness are executing or attesting the document are using an electronic signature.

The Law Commission recommends an industry working group be established to consider practical issues relating to the electronic execution of documents. The working group should, among other things, consider potential solutions to the obstacles to video witnessing of electronic signatures on deeds and attestation and legislative reform to allow for video witnessing. It also recommends a future review of the law of deeds. For further information, see Legal update: Execution of documents: Law Commission report on electronic execution.

On 3 March 2020, the Lord Chancellor and Secretary of State for Justice issued a written statement regarding the government’s response to the Law Commission’s 2019 report on the electronic execution of documents. The written statement:

Agrees with the report’s conclusion that formal primary legislation is unnecessary to reinforce the legal validity of electronic signatures.
Endorses the Law Commission’s draft legislative provision as set out in the report, as reflecting the government’s view of the legal position on electronic signatures. They are permissible and can be used in confidence in commercial and consumer documents.
Accepts the Law Commission’s recommendation that the government should convene an industry working group to consider practical and technical issues associated with the electronic execution of documents, and confirms that the group will be asked to consider the question of video witnessing of electronic signatures.
Notes the need to ensure that reforms regarding electronic signatures do not have any adverse impact, particularly on vulnerable people.
Accepts the Law Commission’s recommendation that there should be a wider review of the law of deeds. The statement notes that the government will ask the Law Commission to undertake this review, although the timing will be subject to overall government and Law Commission priorities given the current volume of law reform work.

See Written statement: Government response to the Law Commission report on Electronic Execution of Deeds.

E-signatures

For a more detailed discussion of the legal aspects of e-signatures, see Practice note, Electronic contracts, deeds and signatures.

Electronic Signatures Directive 1999

Directive 1999/93/EC on a Community framework for electronic signatures provides a definition of an electronic signature. It was implemented in the United Kingdom (to the extent that further legislation was required) by the Electronic Communications Act 2000 and the Electronic Signatures Regulations 2002 (SI 2002/318). An electronic signature means data in electronic form which is attached to, or logically associated with, other electronic data that serves as a method of authentication (Article 2.1). EU member states were required to ensure that an electronic signature was not denied legal effectiveness and admissibility as evidence in legal proceedings solely on the grounds that it is in electronic form. The Law Commission concluded that English law complies with this requirement (see paragraph 3.39, Law Commission: Electronic Commerce: Formal requirements in commercial transactions).

In the Directive, there is also a definition of an “advanced electronic signature” which assumes use of cryptography (see Digital signatures below).

Variety of electronic signatures

The EU Directive definition of an electronic signature sounds complicated, but, as Stephen Mason pointed out in his book Electronic Signatures in Law (LexisNexis Butterworths, 2003), at page 78, there are various types of electronic signature, ranging from the simple to the complex, all of which the Law Commission would argue satisfy the requirements of a traditional signature, including:

Typing a name on an electronic document.
A manuscript signature that has been scanned.
The biodynamic digitised version of a manuscript signature.
Clicking the “I accept” button placed on a
The use of cryptography to include a digital signature.

Digital signatures

The convention has grown up that the expression “digital signature” refers to a particular kind of electronic signature, one that involves the use of asymmetric cryptography. If used properly in the context of an independent certification system, digital signature technology can provide very strong evidence, not only that the “sender” has adopted and approved the contents of the digital message (as with an ordinary signature) but also that:

The digital message has been sent by the party it purports to come from.
The message was not altered between sending and receipt.
It remained confidential during transmission.

In 1999, when the E-Commerce Directive became law, it seemed that digital signature technology would be widely used very quickly, and ambitious plans were developed for all kinds of electronic markets in which the full benefits of this particular form of digital technology would be enjoyed by all. However, although e-business has developed at an impressive pace, the use of digital signatures in the context of formal public key infrastructure (PKI) systems has been nowhere near what was expected in 1999. Back then, it was thought that all sorts of large institutions would become certification authorities within a PKI system. In practice, however, digital signature technology seems to be used mainly outside formal PKI systems.

Some commentators have drawn attention to the legal risks of using digital signatures, but it does seem strange that, given the obvious advantages of digital signatures, they are not used more often in appropriate situations.