Table of Contents
In Short
- A contract may not be legally binding even if signed, if essential terms are missing, there was no intention to create legal relations, or if a valid defence such as misrepresentation applies.
- Key elements for a binding contract include offer, acceptance, consideration, and intent.
- Review contracts thoroughly to ensure all critical elements and intentions are clearly articulated.
Tips for Businesses
Always check that your contracts contain all the necessary elements like offer, acceptance, consideration, and clear intention. Ensuring all parties understand their obligations reduces the risk of disputes. Consider seeking legal advice to verify the contract’s validity and enforceability before signing.
Business owners need to know when they have entered into a legally binding contract. Indeed, many business owners can succumb to the pitfalls of trying to depend on a contract that is not legally enforceable. Importantly, a signature does not always mean that the terms of a contract are legally binding. For that reason, many business owners looking to rely on a legally binding contract can often find themselves unable to depend on the terms of a contract. This is problematic as doing so can cause substantial losses. This article will describe when a signed contract is not binding in the UK.
How Do Contracts Work?
As a business owner, you need to know the fundamental principles that enable a contract to work. Without these five formalities, you will not be able to create a legally binding arrangement that you can rely on to enforce other entities to do business with you. You must have:
- an offer;
- acceptance;
- consideration;
- clarity of contract; and
- both parties must have an intention to create legal relationships.
Offer and Acceptance
For a contract to exist, one party needs to make an offer to another party. That offer must outline the contract’s main terms. For example, you could offer the sale of a piece of computer software for £100. The offer is essentially a promise to do business with another person.
If the other party chooses to accept an offer, the contract becomes live at the moment they accept it. Acceptance means you agree to follow the basic terms of the contract. In contract law, a common way to show acceptance is to sign the contract.
Consideration
The third element you need for a contract to be legally binding is consideration. Consideration is a legal term that you can think of as payment of some form of value.
However, some contracts do not always operate using money. For example, some businesses might exchange services for services or a set of goods for a service. In these cases, consideration expresses the transfer of something of value moving both ways in a contract.
Intention to Create Legal Relations
This is perhaps one of the most important factors in showing that you have a legally binding contract. You will not have an enforceable agreement if you cannot prove that both parties wanted to enter into an agreement.
Where you are dealing with another business, there is a rebuttable presumption of an intention to create legal relations. A rebuttable presumption means the law treats this intention as true unless someone proves otherwise. A party can rebut the presumption by presenting evidence to the court. The party who wants to challenge the presumption must carry the burden of proof.
In proving that you or another party had an intention to create legal relationships, a court will look at your language and how you conducted yourself in the formation of your relationship with your business partners. For example, if you agree to a term sheet that sets out the proposed terms of a contract, you can show that you intend to enter into a legally binding arrangement.
Clarity of Contract
Finally, the terms of your contract must be clearly set out so that all parties understand them.
If your agreement’s terms are unclear or provide any uncertainty to the parties involved in that contract, certain parts of your agreement may not be legally enforceable. Establishing clear terms is particularly hard in verbal contracts with undocumented terms.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
Signing on the Dotted Line
Getting a person’s signature on a document may act as a final assurance that you have created a binding contract. However, if you do not have any other elements that make up a contract, that agreement may not be enforceable, even if all parties have signed it. For example, if a contract’s terms are unclear, you might not be able to rely on them to enforce another party’s obligations or if there is no consideration, there may not be a valid contract to enforce. Furthermore, other situations may compromise a signed contract’s enforceability. These are set out below.
Electronic Signatures and Their Validity
Electronic signatures are generally considered to be valid and enforceable in the UK. However, certain types of documents, such as wills and land transfers, should not be signed electronically. Business owners should be aware of when electronic signatures are appropriate and equally binding as physical signatures.
Someone Signed the Contract Incorrectly
Execution is a legal term that describes the formality of signing a contract. When a party executes a document, they accept to be bound by the terms contained in the document.
It is important to get your execution process right when signing contractual documents. For example, if a person who is not authorised to sign a business contract executes that document on behalf of a corporation, that contract may not be legally enforceable.
Additionally, for a formal document like a deed, relevant parties to that agreement must sign and witness it. If you do not correctly witness a signature on a document, you will not have a legally enforceable contract.
Contract Was Made Under Duress or Undue Influence
Duress is a situation where a party can force, threaten or blackmail another person into agreeing to perform a set of actions that they would not have originally agreed to. Undue influence, meanwhile, is the process where one party exploits or takes advantage of their relationship to coerce them into signing a contract.
In either circumstance, contracts made where someone has not intentionally agreed to enter into that arrangement are not legally enforceable, even if all parties have signed a written contract.
Misrepresentation
Misrepresentation is another factor that can render a signed contract unenforceable. This occurs when one party makes a false statement of fact that induces the other party to enter into the contract. There are three types of misrepresentation:
- fraudulent misrepresentation;
- negligent misrepresentation; and
- innocent misrepresentation.
Unconscionable Consent
Similar to the above, unconscionable consent is where a person takes advantage of a person who is, for example, mentally incapacitated, illiterate or is a minor. The unconscionable conduct will involve acquiring their signature or ascent to a contract when they do not have the capacity to consent properly. A contract made through unconscionable consent is not legally binding or enforceable.
Several Clauses and Partial Enforceability
It is worth noting that in some cases, even if a court rules part of a signed contract unenforceable, the rest of the contract may still stand. This usually happens when the contract includes a severability clause, which explains that if any part of the contract is invalid or unenforceable, the remaining terms will still apply. Business owners should consider including such clauses in their contracts to protect the overall agreement in case of partial invalidity.
Continue reading this article below the formKey Takeaways
Signed contracts are not always legally binding. Although a signed contract is generally easier to enforce than an unsigned one, a court may still find an executed contract unenforceable if one party signed it under duress or if the contract lacks any essential elements of a binding agreement.
For example, you must have:
- an offer;
- acceptance;
- consideration;
- clarity of your contract’s terms; and
- an intention to create legal relations.
If you have signed a contract but do not have one of the above elements, your contract will not be binding under UK law. In addition, contracts made as a result of duress, undue influence or coercion are also not legally binding.
If you need help establishing whether your contractual arrangement is enforceable, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
While a signed contract is often easier to enforce than an unsigned one, the law may still treat an executed contract as unenforceable if one party made it under duress or if it lacks any of the key elements needed for a binding agreement.
After all relevant parties have signed a contract, that agreement becomes legally enforceable.
A verbal agreement can be binding if it meets the essential elements of a contract: offer, acceptance, consideration, intention to create legal relations, and clarity of terms. In some instances, such as assignments or contracts for the sale of land, the law requires that the agreement be in writing.
Generally, contracts made by minors in the UK are not legally binding. There are some exceptions, such as contracts for necessities like food or education, or employment contracts that are beneficial to the minor. Once a minor turns 18, they can choose to ratify contracts made while they were a minor, making them legally binding.
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