Formation of a Contract for SQE1
Contract Law > Formation of a Contract
Formation of a contract is the starting point for every contract law question on the SQE1. If you cannot identify whether a valid contract exists, you cannot analyse any subsequent issue — whether that is breach, remedies, or vitiating factors. Master this topic and you unlock the entire Contract Law subject. Each of the five formation elements — particularly consideration — has its own traps that the examiners exploit.
What Is Formation of a Contract?
Candidates often lose marks on SQE1 by confusing invitation to treat with offer — a distinction the examiners test repeatedly through shop display scenarios. Missing this trap means misidentifying who made the offer and when acceptance occurred.
A contract is a legally binding agreement. For a contract to be validly formed under English law, five elements must be present:
- Offer — a clear, definite statement of terms
- Acceptance — unconditional assent to those terms
- Consideration — something of value exchanged between parties
- Intention to create legal relations — the parties must intend to be legally bound
- Capacity — the parties must have legal capacity to contract
If any element is missing, no binding contract exists. The rules on formation are largely common-law based, developed through centuries of case law, although certain contracts (such as those for the sale of land) have additional statutory requirements.
Key Principles for SQE1
Offer
An offer is a clear, definite statement of terms on which the offeror is willing to be bound. It must be distinguished from an invitation to treat — an invitation for others to make offers.
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Critical distinctions:
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Shop displays and price tags — invitation to treat, not an offer (Fisher v Bell, Pharmaceutical Society v Boots)
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Advertisements — generally invitations to treat (Partridge v Crittenden)
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Statements on the packaging of goods — often invitations to treat (the customer makes the offer at the checkout)
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An offer must be definite.: Vague or conditional language may fail to constitute an offer capable of acceptance (Scammell v Ouston).
Exam tip
Watch for scenarios where a customer enters a shop and picks up goods: the customer is making the offer, not accepting one. The shop's display was merely an invitation to treat. The retailer can refuse at the till — no contract exists until the retailer accepts the offer by ringing it through.
Acceptance
Acceptance is an unconditional assent to all the terms of the offer, communicated to the offeror. Two critical rules apply:
The Mirror Image Rule: Acceptance must mirror the offer exactly. Any variation is a counter-offer, which destroys the original offer and becomes a new offer that the original offeror can accept or reject (Hyde v Wrench).
The Postal Rule: When acceptance is sent by post, it is effective on posting, not on receipt (Adams v Lindsell). This rule does not apply to instantaneous communications such as email, telephone or video call.
Quick Comparison Table
| Scenario | Rule | Effect | |---|---|---| | Offer → Acceptance (matching terms) | Mirror image rule | Contract formed | | Offer → Counter-offer (different terms) | Counter-offer destroys original | No contract; counter-offer is new offer | | Acceptance by post | Postal rule | Effective on posting | | Acceptance by email | Postal rule does NOT apply | Effective on receipt/reading | | Display in shop window | Invitation to treat | Not an offer capable of acceptance |
Consideration
Consideration is something of value exchanged between the parties. Two principles govern it:
- Sufficiency vs. Adequacy: Consideration must be sufficient (of some recognisable value) but need not be adequate (market value is irrelevant — £1 can be consideration for a house) (Chappell & Co v Nestle).
- Past Consideration: Past consideration is not good consideration. Consideration must move at the time of the promise or after, not before it (Re McArdle).
Key exam trap: Performance of an existing contractual duty is generally not good consideration (the old rule in Stilk v Myrick). However, Williams v Roffey Bros modified this: if the promisor receives a practical benefit from the promisee's continued performance, and the promise is not obtained by duress, consideration exists.
Intention to Create Legal Relations
Commercial agreements are presumed to carry intention to be legally bound (Edwards v Skyways). Social and domestic arrangements are presumed not to (Balfour v Balfour), though the presumption can be rebutted if the parties clearly intend legal relations (Merritt v Merritt).
Capacity
The parties must have legal capacity to contract. Key rules:
- Minors (under 18) are generally not bound by contracts except for necessaries (Sale of Goods Act 1979, s.3) and beneficial contracts of service.
- Companies must act within their constitutional powers.
- Crown and public bodies have limited capacity.
How This Appears in SQE1 Questions
SQE1 questions typically present a sequence of communications between parties and ask whether a binding contract has been formed. This is a classic SQE1 trap. The key traps include:
- Confusing invitation to treat with offer — shop displays, advertisements and statements of price are invitations to treat, not offers.
- Missing that a counter-offer has destroyed the original offer — any variation in terms operates as a counter-offer, and the original offer cannot later be accepted.
- Misapplying the postal rule — remember it applies to acceptances sent by post, not to instantaneous communications.
- Treating past consideration as valid — look for chronology: the promise must come after the consideration (or at the same time), not before.
Common Mistakes Students Make
- Treating shop displays as offers — they are invitations to treat. The customer makes the offer; the retailer accepts or rejects at the till.
- Forgetting that a counter-offer destroys the original offer — it cannot later be accepted.
- Misapplying the postal rule — it applies only to acceptances sent by post, not to instantaneous communications such as email or telephone.
- Treating past consideration as valid — consideration must move at the time of the promise or after, not before it.
- Ignoring the practical benefit in Williams v Roffey Bros — performance of an existing contractual duty can now be valid consideration if the promisor receives a practical benefit.
Want to test your understanding of formation? Try a few SQE1-style questions below before moving on.
Quick Summary
- All five elements must be present: offer, acceptance, consideration, intention to create legal relations, and capacity.
- Invitation to treat is not an offer: shop displays, advertisements and price tags invite customers to make offers.
- Acceptance must match the offer exactly: any variation is a counter-offer that destroys the original.
- The postal rule applies only to post: acceptance by post is effective on posting, not receipt. Email and telephone acceptances are effective on receipt/reading.
- Consideration must be sufficient but not adequate: it must be of recognisable value, even if tiny. Past consideration does not count.
- Intention is presumed in commercial contexts but must be proven in social/domestic ones.
Want to test this now? Try a few SQE1-style questions below before moving on.
Test Yourself
Test yourself
Quick check questions based on this article.
Question 1
Scenario
A builder agrees to construct an extension to a homeowner's property for a fixed price of £40,000. The contract specifies that the work must be completed by 1 September. Halfway through the project, the builder informs the homeowner that his costs have increased due to a shortage of materials and that he will be unable to complete the work unless the homeowner agrees to pay an additional £8,000. The homeowner, who has arranged to host a family event at the property on 15 September, reluctantly agrees to pay the extra sum. No other builders are available to complete the work within the required timeframe. The builder has a good professional reputation and has completed several projects in the local area. The builder completes the extension on time and to a satisfactory standard. The homeowner now refuses to pay the additional £8,000, arguing that the builder was already contractually obliged to complete the work for the original price. The homeowner has received compliments from neighbours about the quality of the extension. The builder has not undertaken any additional work beyond the scope of the original contract. The builder seeks legal advice on whether he can enforce the homeowner's promise to pay the additional £8,000.
Which of the following best describes whether the builder can enforce the homeowner's promise to pay the additional £8,000?
Question 2
Scenario
A construction company sends a purchase order to a steel supplier for 500 tonnes of structural steel at £900 per tonne. The purchase order states that the construction company's standard terms and conditions apply, which include a clause limiting liability for late delivery to 5% of the contract price. The steel supplier responds with an acknowledgment of order on its own standard form, which states that the supplier's terms and conditions apply and includes a clause excluding all liability for consequential losses arising from late delivery. Neither party draws attention to the conflicting terms. The steel supplier delivers the steel two weeks late, causing the construction company to incur £80,000 in additional crane hire costs and contractor penalties. The construction company's finance director, who has 20 years' experience in the industry, approved the original purchase order. The steel supplier's managing director attended the same university as the construction company's finance director. The construction company's solicitor is advising on whether the steel supplier can rely on its exclusion clause for consequential losses. The steel supplier performed the delivery using its own fleet of vehicles. The total value of the order was £450,000. The solicitor is considering which party's terms govern the contract.
Whose terms and conditions are most likely to govern the contract between the construction company and the steel supplier?
Question 3
Scenario
A clothing retailer displays a cashmere jumper in its shop window with a price tag of £195. A customer enters the shop and places the jumper on the counter, stating that she wishes to buy it at the displayed price. The shop assistant tells the customer that the price tag is wrong and that the jumper costs £295. The customer argues that the retailer must sell the jumper at £195 because the price was clearly displayed. The retailer has traded from the same premises for twelve years. The jumper is the last one in stock in that size. The shop assistant offers to check whether a manager can authorise a discount, but the customer declines and insists on the displayed price. The customer has previously bought items from the shop without incident. No written contract or receipt has been issued. The customer threatens to report the retailer to Trading Standards. The customer now seeks legal advice on whether she has a contractual claim against the retailer.
Does the customer have a contractual right to purchase the jumper at £195?
Practice with full exam-style questions
Related Topics
- SQE1 Contract Law: Complete Guide
- Consideration in Contract Law for SQE1
- Terms of a Contract for SQE1
- Misrepresentation and Vitiating Factors for SQE1
Practise Formation Of A Contract Questions for SQE1
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