The key to forming a valid and enforceable contract is to ensure that there is clarity and mutual agreement at every stage of the process, from the original offer through to the final acceptance. Parties should understand what the terms of the contract are and when key stages of the formation process are achieved.
In this article, we explain key contract elements and best practice.
In Scotland, there are three core elements that must be present in every contract. These are:
- Agreement on the essential terms of the contract;
- Certainty of the terms of the contract; and
- A mutual intention amongst the parties to create legal relations.
If a contract fails in any of these elements, it cannot be legally valid. This would make the contract unenforceable from the moment of its creation.
Contract Form
It is advisable that contracts should be in written form, but this is not a legal requirement in Scotland. The only exception to this rule is for contracts relating to real rights in land and gratuitous unilateral obligations, also known as promises. These will only be valid if they are in written form in accordance with the Requirements of Writing (Scotland) Act 1995.
Contracts can be formed orally, implied by a party’s conduct, or created through a combination of these forms. However, these types of contracts will not benefit from the certainty that a written contract can provide, or from the greater evidential weight that it carries.
Offer and Acceptance
Contracts are typically brought into existence through offer and acceptance. An offer is a proposal by one party to enter into a contract on certain terms. The terms must be sufficiently detailed and clear so that if they are accepted then a contract can be formed without the need for further bargaining. Often, the terms of a contract will be detailed expressly in a single written document. However, it is also possible to incorporate terms into an offer by reference or through a course of dealing.
Incorporation by: reference
To incorporate terms into an offer by reference the offeror must refer to the relevant set of T&Cs and provide the offeree with a reasonable opportunity to read them. However, if any of the terms are unusually burdensome, the offeror must actively bring that term to the attention of the other party, otherwise it will not be incorporated.
In Blu-Sky Solutions Ltd v Be Caring Ltd [2021] EWHC 2619, the High Court found that a term which included a substantial early cancellation fee was unduly onerous and had been ’cunningly concealed‘ by a supplier. Because the supplier had failed to draw attention to this unusually burdensome term, the Court held that it was unenforceable. We have explored this case in greater detail in the article linked here.
Incorporation by: a course of dealing
It is possible to incorporate terms and conditions into a contract without expressly referring to them if there is a course of dealing between the parties. A course of dealing occurs where the parties are engaged in consistent and regular trading and are aware of and have agreed to the T&CS which govern this relationship. For example, if parties have entered into a series of similar contracts upon certain terms and conditions, those T&Cs may be implied if the parties engage in another contract of a similar nature.
Acceptance
Acceptance is the final and unqualified assent to an offer. In order to finalise a contract, the offeree must communicate their acceptance to the offeror while the offer is open for acceptance. A late acceptance will not only be ineffective, but it may amount to a new offer.
The default length of time that a party has to accept an offer is a ‘reasonable period of time’. However, it is best practice to include a time limit within an offer which states that after a specified date or period of time has passed, the offer is no longer open for acceptance. This avoids any uncertainty over what constitutes a reasonable period of time.
Offers will also cease to remain open for acceptance:
- If the offeror communicates their withdrawal of the offer to the offeree;
- If there is a failure of a condition precedent;
- Upon the death or incapacity of the offeror; or
- If the offer is rejected. Once an offer has been rejected it is considered to be terminated, meaning the offeree cannot subsequently change their mind and accept the offer at a later date.
Acceptance becomes effective when it is communicated to the offeror. The moment at which this happens depends on the mode of communication used by the accepting party: written acceptance or acceptance by conduct.
Written acceptance
If a party decides to communicate their acceptance via a posted letter, the postal acceptance rule will dictate if and when that acceptance becomes effective. Under this rule acceptance is deemed to be effective at the point at which the letter is posted, provided that the letter has a stamp and is addressed correctly.
The obvious issue with this method is that a contract may be formed before the acceptance is received by the offeror due to time delay in mail arrival. The Scottish Law Commission have recognised this issue and proposed that this rule should be abolished.
It may more appropriate to communicate acceptance via email, particularly if parties have an ongoing relationship in which email is the primary mode of communication. Acceptance by email will usually take effect immediately. However, the Scottish Law Commission have also proposed to reform this rule so that acceptance via email only takes effect when the email becomes available to the recipient. If this reform is implemented this would mean that an appropriately worded out of office may stop an acceptance from being automatically effective.
Acceptance by conduct
Although it is preferable for acceptance to be expressly communicated to the offeror, it can be inferred from a party’s conduct. For example, in OMI Facilities Ltd v Bellhill Ltd [2021] CSOH 46 the court found that a contract had been created through the conduct of the parties.
In this case, the pursuer had supplied various goods and services to a hotel since 2010. The defender purchased that hotel in 2011, following which the pursuer continued to provide their goods and services to the hotel despite not signing a new contract. The defender’s position was that there was no contract between the parties. However, the court found that because the pursuer continued to provide goods and services to the hotel after its sale and the defender was aware of this, it could be inferred from the parties’ conduct that the 2010 contract was novated to the defender.
To avoid confusion over whether an offer has been validly accepted, it is best practice to specify a particular form or method of acceptance in an offer. Clarity on these elements, as well as the substantive terms of the contract, will help parties to identify their obligations under the contract and when these become enforceable. This should mitigate the risk of disputes further down the line.
If you would like to find out more about commercial contracts and the common issues our clients face, visit our Commercial Contracts video and article series.