The Key Elements of a Legally Binding Contract
Contracts perform an important function in many different businesses, helping to define and regulate relationships, rights and responsibilities. They can take many different forms depending on the nature of the agreement and the parties involved. However, many commercial disputes arise not because parties intend to fall out, but because a contract was poorly drafted, incomplete or invalid from the outset.
Understanding what makes a contract legally valid, and where risks commonly arise, can help businesses protect themselves and avoid costly disputes.
Key Elements of a Contract
Under English and Welsh law, a legally binding contract requires the following key elements:
- Offer
One party must make a clear and definite offer setting out the terms of which they are willing to contract. Ambiguous statements or “subject to contract” wording can prevent a binding agreement from arising but can form the basis for initial agreements to take place.
- Acceptance
The offer must be accepted unequivocally. Changes to the terms may amount to a counteroffer rather than acceptance, meaning no contract is formed until agreement is reached.
- Consideration
Each party must give something of value, whether money, goods, services, or a promise to do (or not do) something.
- Intention to Create Legal Relations
Both parties must intend for the agreement to be legally binding. In other words, they must mean for it to be enforceable by law, not just a casual or friendly understanding.
In a business context, it is generally assumed that the parties intend to be legally bound. However, this assumption can become blurred when agreements are reached through informal messages, email exchanges or early-stage negotiations that may not reflect the final terms. If these are not carefully drafted and properly documented, businesses can unintentionally create legally binding obligations or leave key terms unclear. In practice, many disputes arise not because the parties disagree on the commercial intent, but because the contract fails to accurately reflect the deal or relies on generic templates that do not fit the specific transaction.
Our Commercial Team at TF regularly advises businesses on the negotiation, drafting and review of contracts as part of wider corporate and company transactions. We help clients identify risks before they become problems, ensure their agreements are legally sound and make sure the contract supports their wider commercial objectives. Whether you are entering into a new business relationship or restructuring an existing one, taking early legal advice can make a critical difference.
If you need any advice on the formation of a business contract, please contact Harriet Brown (hbrown@tolhurstfisher.com).
