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HMRC internal manual

National Minimum Wage Manual

Status: Formation of an enforceable contract

A contract consists of an offer by one party and an acceptance by the other. Both the offer and the acceptance may be written, oral or implied or a combination of these.

For a contract to be valid and legally binding (enforceable) there must be:

  • Agreement; both parties must agree on their respective obligations. Agreement is reached by the process of an offer by one party being accepted by the other.
  • Intention to create legal relations; both parties must intend to enter into a legally enforceable relationship; that is they intend for their respective contractual obligations to be legally enforceable. An intention to create legal relations can usually be inferred from the presence of consideration. However, there may be no such intention in certain family, domestic or social arrangements.
  • Consideration; a contract results from a bargain. Consideration is what each side promises to give up or do for the other. Consideration has to be something of worth such as a payment of money, an item of value, a benefit in kind or a service. In English law, the consideration must be sufficient to reasonably and fairly induce the parties to enter into a contract. For example, promises involving the giving of a gift are not enforceable contracts because the personal satisfaction the giver receives is not considered adequate consideration. This is not the case in Scots law in which the promise of a gift is sufficient to make a contract enforceable.
  • Competent parties; for example, a contract is likely to be declared void if one of the parties has been certified insane
  • Legal provisions; contracts requiring criminal acts, commission of a tort (a breach of civil law such as a trespass) and acts in breach of public policy are illegal and void.

If either party breaks a valid contract they may be sued in court for damages caused by the breach. Sometimes a party that breaks a contract may be persuaded to make an out-of-court settlement, saving the expense of legal proceedings.

It is not appropriate for a NMW Officer to offer an opinion regarding whether a contract is valid and legally binding or not.