For a contract to be valid, it must have four key elements: agreement, capacity, consideration, and intention.
An agreement happens when an offer is made by 1 party (eg an offer of employment) to the other, and that offer is accepted. An offer is a statement of terms which the person making the offer is prepared to be contractually bound to. An offer is different from an invitation to treat which only invites someone to make an offer, and is not intended to be contractually binding. For example, advertisements, catalogues and brochures where prices of a product are listed are not offers but invitations to treat. If they were, then the advertiser would have to provide everyone who 'accepted' them with the product regardless of stock levels.
Acceptance of the offer must be unconditional (eg a signature on a contract of employment) and it must be communicated. Any negotiations between the parties are counter-offers, not acceptance.
Staying silent is not generally considered acceptance, unless it is clear that acceptance was intended (eg by way of conduct, like paying for a product). What constitutes as adequate acceptance will vary depending on the type of contract.
All parties must have the ability to understand the terms of and any obligations under the contract. Also, consent to the contract must be freely given (eg there cannot be any coercion/force, fraud, undue influence, or misrepresentation).
These type of people generally lack the capacity to enter into contracts:
- children under 18 - unless the contract is for necessities (food and clothing) or education (an apprenticeship or employment contract) and the terms are fair and benefit the child
- people suffering from mental health conditions or under the influence of drugs and/or alcohol - only if the condition affects the person's ability to understand the nature of the transaction or if the other party is aware of their incapacity
If a person lacking capacity has entered into a contract, it will generally be up to that person to decide if they want to invalidate the contract.
Parties must exchange some value for a contract to be binding. This is called consideration. Consideration does not have to be adequate or for the benefit of the other person, it merely has to be sufficient (eg if someone offers to sell their house for nothing, there is no consideration; but if they offer to sell it for £1, then there is valid consideration).
Examples of insufficient consideration include:
- an existing public duty (eg a police officer's duty to protect the public) or contractual duty (eg the production of services already required by another contract)
- something with sentimental value only
- something that occurred before the contract - consideration must move from the contract (eg a gift received in January cannot be consideration for a contract entered into in October)
- anything illegal
Not all agreements between parties are contracts. It must be clear that the parties intended to enter into a legally binding contract.
In the case of business agreements, the general assumption is that the parties intended to enter into a contract.
In social situations, there is generally no intention for agreements to become legally binding contracts (eg friends deciding to meet at a specific time would not constitute a valid contract).
It is up to the person who wants the agreement to be a contract to prove that the parties actually intended to enter into a legally binding contract.