In order for a contract to exist it is necessary for the following essential elements to be present:
- Offer & Acceptance
- Consideration (not in Scottish law)
- Capacity to contract
- Possibility of performance
For a contract to be valid both parties must intend to be legally bound to fulfil its conditions.
Offer & Acceptance
The essence of a contract is that there should be an agreement between two parties. An agreement is reached when one party makes an offer and the other confirms its unconditional acceptance. In law, an offer can be in writing, oral or be implied by conduct.
An offer should be distinguished from an Invitation to Treat, which is an invitation to another party, for example a supplier, to make an offer to supply the required product. So
Where an item is offered for sale e.g. in a price list catalogue price, website or in a shop window on display, here the
- invitation to treat – is the publication of the price
- offer (to purchase) – is the buyer’s order or indication of desire to purchase
- acceptance – is when the order is acknowledged or the goods are delivered by the supplier
Where an item is being purchased as the result of a tender or quotation exercise, then the
- Invitation to treat – is asking the supplier to submit a quotation or tender
- Offer – is the supplier’s submission
- Acceptance – is the buyer’s order
Because the contract is formed only after acceptance of an offer has taken place, a supplier can withdraw or amend its price at any stage before acceptance.
The contract resulting from a Request for Quotation (RFQ) or a Request for Tender (RFT) may be one of two types:
- One for immediate supply such as the supply of a product at a fixed price when ordered during the contractually agreed period. For example, in a contract for the supply of 5000 reams of A4 photocopying paper by a stated delivery date, the contractor will have to supply the 5000 reams by that date. Here the contract is formed when the purchase order is placed for the 5000 reams of paper and is completed in stages as the paper is delivered.
- One for the supply of the product, usually at a fixed price, as and when required during the contract period. For example, a contract for the supply of up to 5000 reams of A4 photocopying paper during a stated period of, say, 3 months. Here, there is no guarantee of the actual volume, or frequency of orders, simply that orders may be placed during the period for up to 5000 reams. Here, the purchase order creates a standing offer to purchase paper from the supplier and is therefore a series of contracts created when each delivery of paper is ordered from the supplier
An offer may be terminated in the following circumstances:
- The offer may be revoked at any time before acceptance is communicated to the offeror. Revocation will only be effective when communicated to the party to whom the offer was made
- The offer will lapse if acceptance is not made within a specified time
- The offer will terminate if it is rejected
- The offer will cease to exist if a counter-offer is made
Acceptance must be communicated to the offeror. This can be done either orally or in writing. Where the means of communication is instantaneous (i.e. face-to-face, telephone or email) the contract will come into being when and where the acceptance is received. If it is posted it is deemed effective from the time of posting.
Basically this requires that there must be an exchange (usually measured in monetary terms) in every contract and that only the parties who have given and received the consideration can have rights and obligations under the contract.
Capacity to contract
Generally any person or company of whatever nationality or sex may enter into a binding contract. However, special rules apply for the protection of children under 16, insane persons, and similar persons of whom advantage would be taken e.g. under the influence of alchohol.
To be bound by the contract, the consent of either party must not have been obtained by fraud, deceit, force, fear, undue influence or misrepresentation, whether deliberate or unintentional.
Possibility of performance
For the contract to be enforceable, the obligations must be capable of being performed.
Contracts can be illegal either on account of their infringement of criminal law or because they contain provisions which are immoral or contrary to public policy.