Aligned to AC 1.2 – Analyse the legal issues that relate to the creation of commercial agreements.
1. The five requirements for a binding contract
For a contract to come into being and be legally binding, all five of the following requirements must be present simultaneously. If any one is absent, there is no contract:
- Offer — a full statement of what the offeror is willing to provide and the terms on which they will provide it
- Unconditional acceptance — absolute, unqualified agreement to the offer as made
- Consideration — something of value given by each party in exchange
- Intention to create legal relations — mutual intention that the agreement is legally enforceable
- Capacity to contract — legal capacity and competency to enter the agreement
2. Offer and invitation to treat
An offer exists only once communicated to the other party. It ceases to exist through: withdrawal (revocation), lapse (the offer's time limit expires), death of the offeror before acceptance, rejection (including a counter-offer), failure of conditions, or acceptance.
An invitation to treat is not an offer — it is an invitation for others to make offers. Displaying goods in a shop window, issuing an RFQ or ITT, and advertising prices are all invitations to treat. A party cannot "accept" an invitation to treat and thereby form a contract.
3. Acceptance
Acceptance can only occur while the offer is still open and must be absolute and unconditional. Key rules:
- A counter-offer (a conditional or modified acceptance) constitutes rejection and creates a new offer, destroying the original offer; the original offer cannot subsequently be "accepted"
- Letters marked "subject to contract" are not a formal offer or acceptance — they signal an intention to negotiate, not a commitment
- Acceptance by performance — using goods supplied implies acceptance of the terms attached
- Silence — silence over unordered, unused goods cannot constitute acceptance; no payment can be demanded for goods never requested
- Postal rule — acceptance is effective when a letter of acceptance is posted (not when received), where postal acceptance is reasonably contemplated by the parties (trainer-supplied: established English contract law; the source discusses acceptance rules without naming this specific rule)
4. Consideration
Consideration is what each party gives in exchange — usually money, but can be payment in kind. Key rules:
| Rule | Explanation |
|---|---|
| Sufficient | Must have monetary value — the legal test for validity |
| Adequate | Whether the amount is fair — NOT a legal requirement |
| Present or future | Past consideration (something already done or given) is not valid |
| Not pre-existing duty | A party cannot give something they are already legally obliged to do |
| Real | Must be more than a vague promise |
If there is no consideration, there is no contract. In the context of framework agreements, the position is more nuanced: a framework establishes the terms and mechanism under which future contracts will be awarded; it usually does not guarantee that any purchase will be made or any call-off placed; and each call-off is itself a separate contract. Whether the framework itself creates enforceable obligations depends on its terms and the governing law. In public procurement under the Procurement Act 2023, s.45(2) defines a framework as a contract between a contracting authority and one or more suppliers — so in that context a framework IS a contract, even though it provides only for the future award of contracts.
5. Intention to create legal relations
English law applies a rebuttable presumption:
- Commercial contexts — parties are presumed to intend legal relations; strong evidence is needed to rebut this
- Domestic and social contexts — parties are presumed NOT to intend legal relations
Most procurement arrangements are commercial and therefore carry the presumption of enforceability.
6. Capacity to contract
Those lacking full capacity include:
- Minors (under 18 in most jurisdictions) — contracts generally unenforceable against them, except for necessities
- Persons with severe mental incapacity
- Persons under the influence of alcohol or drugs at the time of contracting
For organisations: ultra vires ("beyond powers") rules limit what a public-sector body may legally contract to do. Any contract beyond its statutory powers may be void or voidable.
7. Third-party rights and deeds
The Contract (Rights of Third Parties) Act 1999 allows a third party to enforce a contract if it expressly confers a right on them, or if it purports to benefit them and they are identified by name, class or description. Parties may expressly exclude this Act.
A collateral warranty is binding only if executed as a deed — a formal legal document that must be signed, witnessed and delivered. Unlike a contract, a deed does not require consideration to be enforceable.
8. Misrepresentation
Misrepresentation is a false statement of fact made before or at contract formation that induces the other party to contract. Three types:
- Fraudulent — made knowing it is false, or recklessly as to its truth
- Negligent — made honestly but without reasonable grounds for believing it true
- Innocent — made honestly and with reasonable grounds
Remedies range from rescission (unwinding the contract) to damages, depending on the type and loss suffered.
9. Battle of forms (trainer-supplied)
Where both buyer and seller attempt to contract on their own standard terms, the battle of forms problem arises. English courts apply standard offer-and-acceptance analysis: the contract is formed on the terms of the last counter-offer accepted by performance — the "last-shot" rule (established in Butler Machine Tool Co v Ex-Cell-O Corp [1979]). Buyers should not complete and return sellers' order acknowledgement forms without qualification, as doing so may accept the seller's terms.
10. Vienna Convention / CISG (trainer-supplied)
The United Nations Convention on Contracts for the International Sale of Goods (CISG) — the Vienna Convention — governs cross-border sales of goods between businesses in contracting states. The UK is not currently a contracting state, so the CISG does not apply automatically to UK-based international transactions, but parties may choose to incorporate it. Key differences from English contract law: no postal rule; consideration is not required for contract formation; an offer may be irrevocable; and an acceptance with minor modifications may still be valid.
§12 trap box: (1) An invitation to treat (RFQ, price list, shop display) is NOT an offer — only the supplier's quotation or tender can be an offer. (2) A counter-offer destroys the original offer — once a counter-offer is made, the original offer is dead and cannot be revived. (3) A framework agreement does not usually guarantee that any purchase will be made — each call-off is a separate contract. However, a framework may itself create enforceable obligations depending on its terms and governing law; and under PA-2023 s.45(2) a public-sector framework IS defined as a contract.