Core principles of contract law - Formation and parties

Learning Outcomes

This article explains the core principles of contract formation and the identification of parties who are bound, including:

• Identifying the essential requirements for a valid contract (agreement, consideration, intention to create legal relations, and capacity) and applying the objective test to parties’ words and conduct.
• Distinguishing between offers, invitations to treat, requests for information, counter-offers, and the various ways in which offers may be terminated.
• Evaluating the rules on acceptance, including communication, the postal rule, instantaneous and electronic methods, unilateral contracts, and stipulated methods of acceptance.
• Analysing when apparent bargains fail for uncertainty or incompleteness, the effect of “subject to contract” wording, agreements to agree, and battle of the forms scenarios.
• Assessing intention to create legal relations in commercial versus domestic or social agreements, and the evidence capable of rebutting the usual presumptions.
• Evaluating the contractual capacity of minors and persons lacking mental capacity or intoxicated, identifying contracts for necessaries and beneficial employment or training.
• Applying the doctrine of privity and the statutory and common law mechanisms by which third parties may acquire or enforce contractual rights, including variation and rescission issues.
• Advising clients in SQE2-style fact patterns on whether and between whom binding agreements have arisen, the enforceability of terms, and the rights and liabilities of third parties.

SQE2 Syllabus

For SQE2, you are required to understand the core principles of how contracts are formed and who is legally bound by them, with a focus on the following syllabus points:

• the requirements for the formation of a valid contract (agreement, consideration, intention to create legal relations, and capacity)
• distinguishing between an offer, an invitation to treat, and other pre-contractual statements
• the legal effect of acceptance and the rules for communication of acceptance, including postal rule and silence
• termination and revocation of offers
• common law and statutory rules relating to the capacity of parties to contract, including minors and mentally incapacitated persons
• intention to create legal relations in commercial and domestic agreements
• the doctrine of privity of contract and its exceptions, including the Contracts (Rights of Third Parties) Act 1999
• advice on enforceability, variation, and the status of parties in particular scenarios.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the essential elements necessary for a contract to be formed and legally enforceable?
2. Which of the following is usually an invitation to treat, not an offer? a) Advertisement of goods b) Statement of minimum price c) Goods displayed in a shop d) All of the above
3. True or false? If a minor enters into a contract to buy food, the contract will always be void for lack of capacity.
4. Which statute gives a third party certain rights to enforce a contract to which it is not a party?

Introduction

A legally binding contract requires an agreement reached with the intention to create legal relations, supported by consideration, and with parties possessing capacity. Understanding how and when an agreement is formed—and between whom it is enforceable—is a core SQE2 contract skill. This article outlines the requirements for valid formation, including the roles of offer and acceptance, capacity, intention, privity, and consideration. It also clarifies when apparent bargains fail for uncertainty or incompleteness and how parties can structure enforceable arrangements in practice.

The elements of contract formation

A contract exists when an agreement gives rise to legal obligations enforceable by the courts. For an agreement to give rise to an enforceable contract, three core requirements must be satisfied: (1) a valid agreement (offer and acceptance), (2) intention to create legal relations, and (3) consideration. Additionally, the parties must have legal capacity. The courts use an objective test: they consider what a reasonable person would conclude from the parties’ words and conduct, not the parties’ undisclosed intentions.

Key Term: contract
A legally enforceable agreement between two or more parties, requiring an offer, acceptance, consideration, intention to create legal relations, and capacity.

Key Term: consideration
The “price” for a promise—something of value given in exchange for a promise. It must be sufficient (recognised by law) but need not be adequate (equivalent in economic value), and it must not be past.

Agreement: Offer and acceptance

Offer and invitation to treat

A valid contract starts with an offer—a definite promise by the offeror to be bound on specified terms if accepted by the offeree. The terms must be sufficiently certain that, if the offeree says “yes,” a court can enforce the bargain.

Key Term: offer
An expression of willingness to contract on specific terms, made with the intention that it is binding upon acceptance.

An invitation to treat is not an offer—it is an invitation for others to make offers, such as advertisements, shop displays, and auction listings. Websites listing goods for sale are generally invitations to treat; the customer’s order is the offer, which the trader then accepts (e.g., by dispatch).

Key Term: invitation to treat
A preliminary statement inviting offers or negotiations, not intended to be binding if simply accepted.

Pre-contract statements can also be mere requests for information (e.g., “Would you take payment in instalments?”). They do not terminate the offer or create new terms. By contrast, a counter-offer proposes new terms and rejects the original offer.

Key Term: counter-offer
A rejection of the original offer by the offeree with the proposal of new terms, terminating the original offer.

Acceptance

Acceptance is the unqualified expression of assent to all the terms of an offer. It must mirror the offer’s terms exactly (the “mirror-image” rule). Attempting to accept but altering terms results in a counter-offer, not acceptance.

Key Term: acceptance
An unconditional agreement to all terms of the offer, communicated by the offeree to the offeror.

Silence does not normally amount to acceptance—something more, such as a positive act or clear conduct, is required. However, acceptance can be by conduct, for example where parties begin performance in accordance with an agreed draft or standard terms. In bilateral contracts, acceptance generally must be communicated; in unilateral contracts (promise in exchange for an act), acceptance occurs through performance of the act.

Communication of acceptance

The general rule is that acceptance must be communicated to the offeror and becomes effective when received by the offeror. Accepted modes include oral, written, and electronic communications. The law recognises specific nuances:

• Instantaneous communications (telephone, telex, fax, email) are effective on receipt. If sent outside normal business hours, receipt may be treated as occurring at the start of the next business day, depending on context and any agreed terms.
• If the offeror stipulates a particular method of acceptance or requires “notice in writing” to be received, acceptance is only effective when that notice is received.
• If the offeree chooses to accept through a method other than the stipulated one, the acceptance may still be valid if it reaches the offeror and the deviation is immaterial, unless the offer expressly requires strict compliance.

The postal rule is an exception, providing that acceptance is effective when posted, not when received, if it was reasonable to use the post and not excluded by the offer's terms. It only applies to acceptance, not to revocation or other communications. Where the offer requires notice to be “received,” the postal rule does not apply.

Key Term: postal rule
Acceptance is effective at the moment a properly addressed and stamped letter is posted, regardless of whether it is received, if post is an appropriate means of communication.

Termination of offer

An offer may be terminated before acceptance:

• By revocation (withdrawal) communicated to the offeree before acceptance. Revocation can be communicated by the offeror or a reliable third party. The postal rule does not apply to revocation—revocation takes effect when received.
• By rejection or counter-offer from the offeree
• By lapse of time or stated expiry
• By death or incapacity of the offeror/offeree (unless acceptance had already occurred)
• By failure of a condition for acceptance (e.g., where the offer is conditional on some event that does not occur)

Special points arise with unilateral offers. Once an offeree has started performance in good faith, many unilateral offers cannot be revoked unfairly—there is an implied obligation not to prevent completion, and revocation must be given the same prominence as the offer to be effective.

Key Term: unilateral contract
A contract in which one party offers an obligation conditional on the offeree performing a specified act, which is completed by performance.

Certainty and completeness

Courts can only enforce contracts where the terms are sufficiently certain. Agreements “subject to contract,” “subject to later agreement,” or “agreements to agree” are generally unenforceable unless there is a clear objective mechanism to resolve outstanding points (e.g., a price formula or expert determination). In practice:

• Parties should avoid vague phrases like “reasonable price” unless supported by an objective benchmark or statutory implication (e.g., a statute implying reasonable price for goods).
• If a material term is left open (e.g., price, delivery date, essential specification), a court may find no concluded contract unless the parties’ conduct demonstrates agreement on essentials and a workable mechanism to fill gaps.

Battle of the forms

Where parties exchange standard terms (each seeking to contract on their own terms), the “last shot” often prevails—the terms last sent and accepted by conduct typically form the contract. Courts examine objective conduct, signatures, and acknowledgements. In practice, clarity can be improved by expressly stating which terms apply and requiring countersignature.

Worked Example 1.1

Priya emails to offer to sell Dan her bicycle for £250, "first come, first served." One hour later, before Dan replies, Priya sells it to Zoe after a phone call. Dan emails a clear acceptance an hour after the bike is sold.

Answer:
Dan’s acceptance is ineffective because the offer was revoked before he accepted. Priya’s sale to Zoe constituted revocation, which is valid when brought to Dan’s attention.

Worked Example 1.2

An advert in a local paper states: "Sofas from £399—while stocks last." Is this an offer or an invitation to treat?

Answer:
This is an invitation to treat. Most advertisements are not offers, but invitations for prospective buyers to make an offer, which the seller may then accept or reject.

Worked Example 1.3

Holly and Sam, flatmates, agree that Sam will cook all week in return for Holly walking the dog daily. Sam does not cook. Can Holly sue for breach of contract?

Answer:
No. This is a domestic/social arrangement and is presumed not to be legally binding unless strong evidence (e.g., written agreement, past disputes over performance) supports such intent.

Worked Example 1.4

Alex (16) buys a laptop for college work on credit. Is the contract enforceable?

Answer:
This contract is enforceable, as the laptop is likely a necessary for education, and the contract is beneficial to the minor.

Worked Example 1.5

A and B agree: "B undertakes to pay C £100 for mowing A's lawn." C is not party to the bargain. B fails to pay.

Answer:
C may enforce the contract directly against B under the Contracts (Rights of Third Parties) Act 1999, provided it is clear the term was intended to benefit C.

Worked Example 1.6

Buyer emails: “We accept your price—delivery in 14 days.” Seller replies with a pro-forma referencing Seller’s standard terms including a limitation clause and then ships the goods. A dispute arises about the limitation clause.

Answer:
The court will examine the parties’ communications and conduct. If Buyer’s acceptance did not include Buyer’s terms and Seller’s shipment followed a document making clear that shipment was on its terms, Seller’s terms may prevail as the “last shot.” Clear incorporation and any acknowledgment by Buyer will strengthen that outcome.

Worked Example 1.7

An offer states “acceptance by email only.” The offeree posts a letter of acceptance which is delayed in the post.

Answer:
The postal rule will not apply because the offer prescribes email as the exclusive method. Acceptance is ineffective until communicated by the stipulated method (email). A letter does not satisfy the specified requirement.

Worked Example 1.8

Two companies sign “Heads of Terms” marked “subject to contract” and begin performance for three months without executing a final agreement. A dispute arises; one party argues there is no binding contract.

Answer:
“Subject to contract” typically prevents enforceability until formal execution. However, if the parties performed on the basis of agreed terms and their conduct evidences a concluded bargain on essentials, a court may find an implied contract on those essential terms. Clear “subject to contract” wording and ongoing negotiations weigh against enforceability.

Consideration

Consideration is required in simple contracts (those not made by deed). It must be sufficient in law, not merely a token gesture in fact, and cannot be past. Key points:

• Consideration need not be adequate; a peppercorn can suffice if requested by the promisor as the price for the promise.
• Past acts are not good consideration unless there was a previous request for the act and both parties understood it would be remunerated later (the “previous request” exception).
• Performing an existing legal duty normally is not good consideration for a promise to pay more. However, if the promisor obtains a practical benefit from the alteration (e.g., avoidance of penalty, timely completion), that practical benefit can, in appropriate circumstances, constitute consideration for the promise to pay more.
• A promise to accept less is generally unsupported by consideration (the debtor provides nothing new). The promise may nevertheless bind under promissory estoppel if it is inequitable to allow the creditor to resile, but estoppel is typically a shield (a defence), not a sword (a cause of action), and applies to variations rather than initial formation.

Contracts by deed (e.g., a formally executed deed) do not require consideration.

Intention to create legal relations

Not all agreements are contracts. The law only enforces those made with the intention to create legal relations. There is a general presumption that business agreements are intended to be binding, and that domestic or social agreements are not, unless there is clear evidence to the contrary.

Key Term: intention to create legal relations
The requirement that parties must intend their agreement to give rise to legally enforceable obligations.

Indicators of intention include formality, written terms, price and performance linkage, and statements such as “subject to contract.” In commercial settings, words like “binding in honour only” or explicit disclaimers can rebut the presumption. In domestic settings, evidence of seriousness, reliance to detriment, or written terms can support intention.

Capacity to contract

The law protects certain people (minors, people with mental disorders, or under severe intoxication) from being held bound by most contracts. It also recognises that companies and other artificial persons have capacity within their constitutive documents and statutory framework.

Key Term: capacity
The legal ability of a party to enter into a binding contract.

Minors

Contracts entered by minors (under 18) are unenforceable except for those for necessaries (goods/services essential and suitable to their condition in life) or beneficial contracts of employment or apprenticeship. A minor is liable to pay a reasonable price for necessaries supplied, measured at the time of supply based on actual need and suitability to the minor’s condition.

Key Term: necessaries
Goods or services suitable to a person's condition in life and actual needs at the time of sale and delivery.

Beneficial employment/apprenticeship contracts are enforceable where terms are generally beneficial (training, remuneration, no onerous restraints). Purely commercial credit agreements with minors are commonly unenforceable except as accompanying necessaries.

Mental incapacity and intoxication

A contract entered into by a person lacking the capacity to understand its nature and effect may be voidable if the other party knew or ought reasonably to have known of the incapacity. The Mental Capacity Act 2005 provides the functional test: whether the person was unable to understand, retain, use or weigh information relevant to the decision, or to communicate the decision, at the time. Intoxication can also impair capacity; contracts are voidable if the other party knew of the intoxication and took advantage. However, such persons remain liable for necessaries supplied to them.

Companies and other entities

Companies and LLPs contract through authorised agents, and their capacity is governed by statute and their constitutions. Apparent (ostensible) authority can bind a company where the principal’s representation leads a third party reasonably to believe the agent had authority.

Worked Example 1.9

A minor signs a two-year employment contract including a broad non-compete clause preventing work in any hospitality role for 12 months post-termination.

Answer:
The employment contract may be enforceable if, as a whole, it is beneficial to the minor (training, pay). However, an onerous restraint clause is unlikely to be treated as beneficial. The restraint may be severed or the contract treated as not beneficial, leading to non-enforceability against the minor.

Privity of contract and rights of third parties

The doctrine of privity states that only those who are parties to the contract can enforce or be bound by it. Consideration must move from the promisee: a third party who provides no consideration cannot, at common law, enforce the promise.

Key Term: privity of contract
The rule that only parties to a contract have rights and obligations under it.

Statutory exception: Contracts (Rights of Third Parties) Act 1999

This Act allows a third party to enforce a contract if:

• The contract expressly states that the third party can enforce the term, or
• The term purports to confer a benefit on the third party, and the contract does not show otherwise.

The third party must be identified in the contract by name, or as a member of a class, or by description (not necessarily specifically named). The third party’s rights are subject to the terms of the contract and any defences available to the promisor. Parties can include arbitration or jurisdiction clauses binding the third party’s claim.

Key Term: Contracts (Rights of Third Parties) Act 1999
Statute that enables certain third parties to enforce contractual terms, even if not party to the contract, if the contract so provides or grants them a benefit.

Variation and rescission: the parties cannot vary or rescind the term in a way that removes or alters the third party’s right without the third party’s consent where the third party has assented to the term or relied on it (and the promisor is aware of the reliance), unless the contract reserves the right to vary without consent. Many commercial contracts include a clause permitting variation by the parties without third-party consent.

Common law exceptions

• Agency: an agent can contract on behalf of a principal, creating rights and duties for the principal
• Trusts: a party may hold contractual rights “on trust” for a third party
• Assignment: parties may assign their contractual rights to a third party, who can then enforce them (subject to various restrictions)
• Collateral contracts: a separate contract may arise between a third party and a contracting party (e.g., reliance on a promise made to induce purchase from another)

Third-party enforcement remains subject to applicable limitations (e.g., exclusions or limitations of liability enforceable under statute when fair/reasonable in the context).

Worked Example 1.10

A building contract names purchasers of units (by class/description) as “beneficiaries of the defects warranty” and states they may enforce repair obligations. The developer and contractor later sign a variation removing the purchasers’ enforcement right without consulting any purchaser.

Answer:
Under the 1999 Act, a purchaser, identified by class in the original contract, can enforce the defects warranty if the term purports to confer a benefit and the contract does not exclude third-party enforcement. Once a purchaser has assented or relied (with developer’s knowledge), the parties generally cannot rescind the right without the purchaser’s consent unless the contract reserves a unilateral variation power. Any such reservation must be clear.

Practical tips on formation and parties

• Use clear language for offers and acceptance; specify method of acceptance (e.g., “email acceptance effective when received”) to avoid postal rule disputes.
• Avoid “subject to contract” ambiguity—either proceed only after formal execution or include an express clause clarifying when performance indicates acceptance of binding obligations.
• For minors and persons lacking capacity, consider requiring a guarantor (in lawful contexts) or limiting contracts to necessaries or beneficial engagements.
• Where a third party is intended to benefit, expressly identify them and state whether they may enforce and whether variation requires their consent.

Key Point Checklist

This article has covered the following key knowledge points:

• The formation of a valid contract requires an agreement (offer and acceptance), consideration, intention to create legal relations, and capacity.
• An offer must be clear, certain, and communicated; acceptance must match the offer and usually must be communicated, with exceptions for unilateral contracts and the postal rule. The postal rule applies only to acceptance and can be excluded.
• An invitation to treat is not an offer; most advertisements and shop displays are invitations to treat. Requests for information do not terminate offers.
• Offers may be terminated before acceptance by revocation, rejection, counter-offer, lapse, or the parties’ incapacity or death. Revocation is effective when received and can be communicated by a reliable third party.
• Agreements “subject to contract” or “to be agreed” are generally not enforceable unless an objective mechanism exists to resolve outstanding points or parties’ conduct evidences a concluded bargain on essentials.
• In “battle of the forms,” the last set of terms accepted by conduct often prevails unless otherwise clearly agreed.
• Consideration must be sufficient and not past; performing an existing duty is generally not consideration, subject to “practical benefit” reasoning. Promissory estoppel may support a promise to accept less as a defence.
• Only parties with capacity can enter contracts; minors and those lacking mental capacity may be bound only by contracts for necessaries or beneficial employment, and contracts can be voidable if the other party knew of incapacity.
• Only parties to a contract may enforce or be bound by it, except as provided by statute (notably the Contracts (Rights of Third Parties) Act 1999), agency, trusts, collateral contracts, and assignment. Variation affecting a third party’s enforcement right may require the third party’s consent.
• In commercial settings, intention to create legal relations is presumed; in domestic settings, the opposite presumption applies, rebuttable by evidence of seriousness, formality, or detrimental reliance.

Key Terms and Concepts

• contract
• offer
• invitation to treat
• acceptance
• unilateral contract
• postal rule
• counter-offer
• intention to create legal relations
• capacity
• necessaries
• consideration
• privity of contract
• Contracts (Rights of Third Parties) Act 1999