Promises, promises - when do you have a legally binding contract?

While some business transactions are quick and simple, many involve protracted negotiations as you shop around for the best provider of goods or services and negotiate hard to get the best terms and conditions. Some businesses in your supply chain may have a formal process for purchase orders and contract execution, while things may be more relaxed with smaller companies or ones where you have a longstanding relationship. Perhaps some of your supply chain have introduced electronic signatures and you are wondering if they are legally valid or if you are required to sign in that way.

It is important to understand what makes a legally binding agreement, and why additional safeguards may be needed.

The five steps to forming a contract

English contract law sets out five requirements needed for a contract to be legally formed:

• an offer has to be made from one party to another;
• one party has to accept that offer – although there may be some counteroffers before an acceptance takes place, for example with negotiations on pricing or additional services;
• the price and payment terms for the goods or services needs to be agreed;
• there needs to be an intention between the two parties to enter into the contract; and
• any additional terms must be agreed between both parties.

A handshake or an oral agreement

It is possible to complete all the above five requirements orally and seal the deal, so to speak, with a handshake to represent the signatures and acceptance of the contract. However, an oral agreement is all well and good until there is a problem and you require clarity over the obligations of each party.

There is an increased risk of conflict arising if the contract is broken, as a lack of written terms means the parties cannot be held accountable as easily. It can also be difficult to show the true intention of each party, and if the intention is missing the contract could be invalid.

Similarly, there is a risk that proof will not be available as to the exact terms or detail of discussions. Even in a business meeting, it is not always possible to remember each statement spoken unless a witness is present or minutes are recorded and agreed.

It is always advisable to have some record of what was agreed in writing, such as sending an email later to confirm your understanding. This also provides an opportunity to address any further details to be considered, negotiated, and discussed before agreement is reached.

Paper versus digital contracts

The obvious advantage of a written contract is that it provides clarity about what exactly was agreed and thus reduces the likelihood of a dispute about the terms of the agreement or its validity.

It is possible to agree a simple contract through an exchange of emails without any party signing the agreement, as long as the five requirements outlined above have been met.

However, as can be seen from the number of contractual disputes which end up in the courts, there is huge scope for ambiguity in a business agreement and differing interpretations. There could also be a risk of one party claiming there was no intention to enter into a contract, so it is advisable to have each party agree to a written document, whether this is confirmed by a signature or acceptance of terms and conditions digitally. Often digital contracts are concluded online with the tick of a box that states ‘I accept the terms’ or similar.

Where the contract is perhaps a high value contract or dependent on key personnel from either or both parties, getting the terms drafted properly and signed will not be the only requirement to ensure the contract is valid. Checking the signatories’ authority to bind the contract could be a crucial pre-execution step. 

Does a digital signature bind a contract?

Digital signatures, if used, are binding. Electronic signatures have been recognised as a legal way to bind a contract as provided in the Electronic Identification and Trust Services for Electronic Transactions Regulations (Regulations) in 2016 and the Electronic Communications Act of 2000 (ECA).

If you wish to accept digital signatures for your business contracts, it is recommended to use reputable software that ensures security and compliance with other laws such as data protection and privacy. This type of software could help mitigate against fraudulent use of digital signatures – for example, if someone uses your login details and signs without authority.

It is advisable to discuss your position and sensitivities related to how a contract is validly executed with a solicitor who can help you navigate whether your circumstances suit using digital signatures to bind a contract or not.

Do I have to use an electronic signature?

There is also no requirement for all parties to sign a contract digitally unless it is specified in the agreement to be the wish of all the parties. You could, therefore, have one party in another part of the country signing digitally and the other party signing in ink or printing a copy, manually signing and uploading the signed version onto a portal or sending it back to the other party by email or post.

Can electronic signatures be used on all contracts?

Digital signatures cannot be used on all contracts. For example, guarantees, some financial documents and property sale documents are still required to be signed in person on paper.

How to ensure amendments to a contract are legally valid

The wording in the contract will determine how any amendments will become effective.

Usually a written contract will require agreement of both parties in writing, indicating that signatures of each party would be expected.

In a professionally drafted contract, the execution clauses provide important clarity. For example, if an execution clause states that the contract must be signed either electronically or in ink, it would be important to make clear whether the same method of signature or another method would be accepted by the parties for any future amendments to the contract.

How we can help

While an oral contract may be legally binding, the interpretation challenges they could present to prove intent (among other things) means that it is best practice to always have a written contract.

Whether your contracts can be signed in ink or electronically is less important than the detailed terms of the contract. One way to always ensure that your business agreements are legally valid is to have them drafted or checked by a solicitor before you confirm your acceptance, and this will also ensure your business interests are protected.

For an informal discussion, please contact Ian Barnard, Head of our corporate and commercial team on 01653 600070.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.