Video

Wragge & Co experts take a look at topical issues in contract law. Covering everything from competition law and boilerplate, to trends in liability law and how to terminate a contract, they outline the main issues in-house lawyers should consider.

Contract formation

David Lowe: Contract formation - we all take it for granted. We assume the contract will be formed, but it's trickier than you'd think. David Hamlett is going to guide us through the common traps in this area.

So David, let's get right back to basics. What is a contract?

David Hamlett: It's a very good question David and if you cast your mind back through legal history, the reason we have contract law is actually to stop people beating each other up in order to enforce their respective rights. Because that's what used to happen - might was right.

So what a contract is, is something recognised by the legal system that you're in - in this case English law - as being a binding obligation and something that you can go to the court and enforce.

David Lowe: So, what elements must a contract include?

David Hamlett: It depends upon the governing law. It'll be governed; if it's under English law, then you need an offer that sets out the terms sufficiently clearly, an unequivocal acceptance of that, consideration, an intent to be legally bound and also certainty about what the terms are.

David Lowe: In-house lawyers usually come "after the horse has bolted", after the commercial deal is done. What challenges does that pose?

David Hamlett: Well, the challenge is a very simple one. There is a big risk of ending up with contractual terms which are unacceptable to the organisation that the in-house counsel works for. Because once you've entered a contract, you can't change the terms unless it's mutually agreed. So the danger for in-house counsel is that they're brought in at a time after the contract has been concluded and the terms aren't what the negotiation parties wanted.

David Lowe: So what is it an in-house lawyer can do to ensure that they don't end up in court or in a poor contract?

David Hamlett: Well I suppose at its most basic, the thing is to be very clear about who's got authority in the company to enter into contracts. It's fine if you've got a formal written contract, because you know when you sign it, that's it. But most contracts are actually done over the phone, in negotiation, based on the two parties standard form contract. And it's not always clear when the contract is struck to a non-lawyer. So, the key thing is the people negotiating the contracts need to understand the contract mechanics and be very clear with the other side when they are, and when they are not, prepared to contract.

David Lowe: David, how has technology changed the way in which we conclude contracts?

David Hamlett: Not as much as you think. There's been lots of stuff about electronic signature. If you put something down as intended to be a signature – so you write David at the end – then you're intending it to be a signature; it is. If merely the email happens to have your name in the heading then it's not and there's a case, the Metha case, which makes that absolutely clear. So the magic is: what is intended?

David Lowe: What are the main things that in-house lawyers need to bear in mind on contract formation?

David Hamlett: I think the biggest thing is around heads of terms and letters of intent. When do those become contractually binding and when are they merely part of negotiation? So the key thing for in-house counsel is to work out who's got contractual authority. Who's dealing with big, hairy, risky contracts? And either do them themselves or make sure that the people doing them are competent.

This video may contain information of general interest about current legal issues, but does not give legal advice.