Formation of a contract
Can a letter of instruction be a legally binding contract?
The established principles relating to the formation of a contract are well known. In order for there to be a valid contract there must be (1) an offer, (2) acceptance of that offer, and (3) consideration.
An offer can be made expressly by conduct or words and is underpinned by the enshrined factor that there must be an intention to create legal relations. The person making the offer must have the intention that if the offer is accepted it will become legally binding, whereas the receiver of the offer must believe that the party making the offer has that intention.
Whether there is an intention to be legally bound is a question of fact which will be decided by the courts on reviewing the particular circumstances of the case, including the objective intentions of the parties to the document in question.
In an ordinary commercial context, there is a presumption that the parties to an express document have the intention to be legally bound by it. This is rebuttable; it is for the party arguing that there is a lack of intention to be legally bound to prove as much to the Court and the burden is a heavy one.
In the recent complex case of Chudley and others v Clydesdale Bank Plc (t/a Yorkshire Bank), the Court of Appeal held, in relation to one of the three grounds of appeal, that a letter of instruction expressed an ‘irrevocable and unconditional’ instruction from a developer to the bank and was a valid binding contract.
The Court of Appeal in reaching its decision highlighted the heavy burden of proving a lack of intention and found there was no evidence or, at the very least, insufficient evidence to prove a lack of intention as a result of an unfulfilled pre-condition of the letter of instruction.
Whilst this case has not changed the established principles of contract formation, it is a warning to those who are creating any commercial documentation to:
- preserve their intention for creating the document;
- consider whether it is capable of satisfying the established principles to create a binding contract; and
- consider who has the ability to enforce it.
It is harder to argue that there is a lack of intention to create a legal relation, than it is to consider and enshrine the purpose of the document at the start, thereby undermining any dispute later on.