At its core, the Bill aims to establish clearer rules for both individuals and businesses on the formation of binding agreements, as well as what remedies are available on breach. This follows the recommendations made by the Scottish Law Commission in its 2018 Report on Review of Contract Law.
This article discusses what we see as the practical implications of Part One of the Bill, concerning the formation of contracts, for the drafting and acceptance of contracts. The Bill codifies a number of provisions relating to contract formation which were previously found in common law.
Autonomy of parties - the Bill is clear that parties are free to contract out of any of the provisions relating to contract formation. The concern was that the provisions may be too inflexible for complex transactions, so this allows for flexibility.
Formation of contract
Offer and Acceptance: The Bill clarifies that a contract is formed through an offer (a definite proposal to contract) and an acceptance (a statement of conduct which shows unqualified assent).
- Requirements: The agreement must contain the "essential characteristics" of the proposed contract, as well as "sufficient content". A contract may still be formed even if some points remain unresolved, provided these essentials are present and neither party explicitly requires an outstanding matter(s) to be agreed upon for a contract to be concluded.
- Intention: The Bill states that a contract can be formed when the parties, coming to an agreement, intend for it to have legal effect. This is very broad, and what this means, in other words, is that communication, therefore, can form the basis of a contract (see below).
- Offers: The Bill provides that an "offer" arises where (1) the offeree has reasonable grounds to believe that the offeror intends for a contract to be formed, and (2) the proposal must be capable of being given legal effect if accepted. Interestingly, the Bill specifies that an offer may be addressed to four different categories of recipients: (1) a specific person, (2) to persons of a particular description, (3) to persons in general, or (4) the public at large.
- Responding to an offer: The Bill outlines the following rules:
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- An offer can be revoked (i.e. withdrawn) by the offeror only before the offeree accepts an offer or, essentially, starts acting as if the contract is in effect.
- An offer lapses when there is a "fundamental change of circumstances", for example, when a party to a contract dies, or a party becomes incapable of forming a contract. Notably, an offer does not lapse when a party becomes insolvent.
- An offer can be accepted via a statement (of whatever kind), or conduct (of whatever kind that the offeror is aware of) which demonstrates "unqualified assent". Silence or inactivity cannot show such assent.
- A "qualified acceptance" of an offer is a rejection of an original offer, followed by a counter-offer. This is relevant to the "battle of the forms" whereby two parties exchange conflicting terms and there is a debate as to which terms apply - usually it is the "last shot" which prevails. The Bill leaves this to be governed by the common law, a position the Law Society has expressed support for.
- When an offer is rejected, it is said to lapse.
- An offer, and an acceptance of an offer, can be withdrawn before either is accepted by the other party.
- The Bill states that an acceptance of an offer is only effective if it occurs before the expiry of any time limit which was specified in the offer, and if no period of time was specified, within a reasonable time after the notification of the offer was made.
- Notification: In relation to the formation of a contract, the Bill clarifies that a "notification" to a person of an offer, acceptance, rejection or otherwise, takes effect "on reaching that person".
Also of significance in the Bill is the abolition of the "postal acceptance rule". This is an old rule whereby a contract is formed when an acceptance of an offer is put in the post as opposed to when it is actually received.
Practical implications for individuals and businesses
Although the new Bill lays out a written set of provisions detailing how contracts are formed, it is important to note that these are just default rules, and the Bill provides parties with discretion to form a contract outside of these rules. This is particularly helpful for larger, more complex contracts whereby conforming to these rules may prove more challenging than shorter contracts.
The Bill, however, still gives rise to a number of important considerations that should inform the formation and drafting of contracts:
- The wording that an agreement must have both "the essential characteristics of a contract of the kind in question" and "sufficient content", provides a good steer as to what can amount to a legally binding agreement, while still affording flexibility to parties drafting contracts as to what exactly is contained within them.
- Clarifying how a contract is formed helps individuals and businesses better understand what constitutes a contract. The wording that "a contract is formed on the parties coming to an agreement… which they intend to have legal effect" also recognises that communication between parties can constitute legal obligations. This will make it easier for more informal, shorter contracts to be given legal effect. However, this may increase the risk of mistaken beliefs that consensus has been reached. For more complex agreements, individuals and businesses may wish to contract out of this. One way to do this would be to stipulate that agreement must be recorded in some tangible form, i.e., within an email which makes it clear that agreement is reached or, traditionally, written out.
- Although the Bill affords flexibility in terms of who an offer can be made to, there is potential for overlap between the categories of recipients. This may give rise to questions as to how narrow or broad a recipient could be interpreted as. The broader the category of potential recipients, the greater the risk a 'communication', which is already quite broad, is wrongly interpreted as an offer instead of an invitation to treat. The reasoning behind these broad categories appear, from earlier Law Commission consultations and reports, to be the desire to avoid saying that public offers are "not" offers unless certain conditions are met, which adds no real clarity. Instead, the Bill positively states that an offer may be addressed to those recipients. In any event, best practice would be to use clear and unambiguous language if you intend to make an offer to clearly identified groups of persons.
- The added flexibility that the Bill affords in terms of a contract being formed when there is intention to, means that a wide range of actions and statements, such as an email or a Teams call, could form the basis of a binding contract. This increased flexibility means that businesses need to be sure what can be treated as legally binding. Businesses may wish to consider inserting in their Terms and Conditions that an agreement to contract must be in writing, and they may wish to include as a footer in an email that nothing constitutes a binding legal agreement unless otherwise specifically stated.
- The Bill's clarification of "notification" reflects modern practice where offers and acceptances are usually sent electronically. However, the wording does leave some uncertainty as to out of office replies, email filtering systems, and server delays. Does a notification reach a person when it enters their inbox, or when they open the message? This will remain to be seen. In the meantime, it may be good practice to include additional recipients into important email correspondence in these circumstances. Further protection would be to include within out of office replies a statement which provides that no intimation will be received to that mailbox during the out of office period. Businesses may also wish to address this scenario in their own T&Cs whereby a notification reaches an individual when an email is read. Indeed, read receipts may become handier as this Bill is implemented.
The Bill affords significant flexibility to parties in a contract. Businesses should be mindful of ensuring that their internal processes, communications and contract-formation policies are robust, consistent and understood. Individuals must also be confident as to how their statements and actions can give rise to legally binding agreements.
While the Bill abolishes some long-standing doctrines and introduces wording which is more supportive of the digital age, it should be viewed as more of an orderly refinement than a complete overhaul of the law. The Bill certainly leaves Scots Contract Law on a clearer footing in several key areas, particularly over what constitutes formation of a contract.
Royal Assent is still to be received, following which implementation of the Bill will hopefully take place soon thereafter.
What can MFMac do for you?
MFMac's commercial team can help individuals and businesses navigate the intricacies of Contract Law. Our Commercial Contract solicitors can provide robust advice, and we specialise in ensuring your contractual agreements are aligned with your goals. We focus on safeguarding your business interests, making every contract as legally and commercially protective as possible.
