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How contracts are formed in English law

Contractors deal with contracts all the time – the clue is in the name. Contract law is a complex area, in which some lawyers specialise. However, a basic knowledge of contract law can help contractors deal with simple disputes.

More importantly, an understanding of how, and at what point of time, contracts are formed can help a contractor know when to seek professional assistance if a dispute escalates.

“When a question arises as to whether or not there is a contractual problem, the first question to ask is whether a contract has actually been formed; closely followed by the second – what are its terms?” explains Roger Sinclair of contractor legal specialist Egos.

“A contract is formed at the first point of time at which all its essential elements are present,” he adds.

What constitutes a legally binding contract?

There are two ways of looking at this question, and either should produce the right answer, although, in some situations, one of the approaches may feel a little lengthier than the other.

The first way is the conventional approach, developed by case law largely during the nineteenth century, and envisages a sequence of:

  • Offer – from one party, incorporating all the key provisions, in a way that has a certain and unambiguous meaning. In a contracting context, is it clear who the client is? Is it clear who the agent is? What is the nature of the work? Where will the work be completed? What is the rate? What is the period of the contract?
  • Acceptance – from the other party, accepting what was offered, as opposed to indicating that something else would be accepted – doing that would generally be considered to amount to a counter-offer.
  • Communication of acceptance – the point of time at which the message communicating acceptance leaves the control of that party en route to the other. For example, if by letter, when it is dropped in the mailbox – or, if oral, when the words leave the contractor’s mouth, in the hearing of the other party.

And that sequence must be accompanied by:

  • Considerationeach party must put something into the deal. Consideration is likely to be present in a situation where it is envisaged that one party will be working and the other party paying. So, each is providing some consideration and putting something into the deal.
  • Mutual intent to create legal relations – can it be inferred from the circumstances that both parties intended the contract to take effect? Heading communications with the phrase ‘subject to contract’ will generally indicate the absence of such intent. Starting work may show consensus, but of itself does not necessarily show mutual intention to become legally bound.

Provided all five of the above are present, and the contract is not for some other reason unlawful, a contract will be formed.

Nowadays, there are many situations where analysis into the back and forth of offer-acceptance-communication of acceptance may seem overly artificial, and it may be helpful instead to combine the first three ingredients – in which case the result is:

  • Consensus ad idem – the point in time at which clear agreement, a true meeting of minds between two or more parties with the legal power to contract as to all material provisions, can be seen to have been reached.
  • Consideration as above.
  • Mutual intent to create legal relations as above.

Contractors should note that:

  • Most contracts do not need to be in writing to be enforceable
  • Varying a contract already in existence will generally itself constitute a contract, and so will require the same list of essential ingredients.

Mutual intent will generally be indicated where both parties sign the contract

Where there is a document containing contract terms that is signed by both parties, or where both have signed and swapped an identical copy, it will generally seem quite clear that the parties have reached consensus, and have agreed to become legally bound by the terms.

What happens when a ‘contract’ is unsigned?

What happens in the not-unusual situation where there is a document that looks like a contract, has a space on it for signature, but is unsigned? The answer will depend on all the facts, but is likely to be that:

  • The unsigned document does not evidence the formation of a contract, but
  • if the parties have acted in a way that suggests that there is a contract, such as by starting to perform it, in a way that is consistent with the provisions of the document, then the courts may treat those actions as evidencing (a) the formation of a contract, (b) on the terms of the unsigned document.
  • On the other hand, there may be some evidence that one party expressly did not agree to all the terms of the document, or did not yet intend to be legally bound.

As was said in a recent case:

“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.”

Starting work before all the terms are agreed

There is a particular danger in starting work while contract terms are still the subject of negotiation and, whilst it is preferable to avoid such a situation, there are times when doing so may be difficult.

A contractor wishing to take this risk would be well advised to expressly tell the agency, at least by email, that the fact that they are turning up on site tomorrow does not mean that the contract terms are agreed.

The contractor taking this approach may risk not being paid if the negotiations do not result in agreement. Less obvious is the inevitable fact that the contractor who takes this approach weakens their negotiating position – and for that reason Sinclair’s general advice remains ‘don’t leave home without it’.

Other common pitfalls

According to Sinclair, there is always a possibility that the agency will ‘revoke’ the contract offer before the contractor has had an opportunity to accept and communicate acceptance.

“There is no rule that says that revocation of an offer has to be in a particular form,” says Sinclair. “It is sufficient that the communication advising the contractor of the revocation is clear in its meaning, and actually reaches the contractor before the contractor communicates his/her acceptance.

“In other words, a telephone call or an email to the contractor may be an acceptable form of revocation – provided it is actually received. Contrast this with accepting an offer – where the message conveying acceptance simply has to pass out of the accepting party’s control.”

Another concern, cautions Sinclair, is signing contracts long before the start date – thus tying the hands of the contractor for a period during which the agency itself, more often than not, can terminate without notice before the contract starts.

Contractors should always keep copies of contracts

Contractors should always keep a copy of contractual documents that they have signed and which have been signed by the agency. They should not rely on the agency to send one back to them, as it may not do so, or it may alter the wording without the contractor’s knowledge.

Sinclair highlights that this is particularly significant where an increasing number of agencies expect contractors to sign up online: “If you don’t keep a copy, how might you know in the future that the document the agency then produces is, in fact, identical to the document you agreed to?”

Can compensation be claimed for breach of a contract?

If the contractor can prove that a legally binding contract was made, and the agency is in breach, the contractor may be entitled to damages, says Sinclair.

“As always, contractors should check that all the ‘ingredients’ necessary to form a contract are present. The amount recoverable would in principle be that required to put the contractor in the position in which they would have been had the agency not broken the contract.

“However, where the damages claimed are for the loss of the contract itself, the damages will generally be limited so as to cover only losses incurred during the period until the agency could have lawfully terminated the contract.”

It follows from this that, where an agency has the right to terminate by immediate notice, such a damages claim is likely to be worthless.

Even in circumstances where there is a damages claim for breach, Sinclair stresses that the contractor has a duty to mitigate their loss by trying to find other work, and giving credit for any other earnings during the period for which they have claimed.

Published: 06 August 2015

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