Understanding the Legal Difference Between an Offer and a Contract in Business and Employment

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Published: 07 Jul 2023

Whether you are managing a business or seeking employment, it is important to understand the legal difference between an offer and a contract.  

This knowledge is critical because it determines the rights and obligations of the parties involved. In this blog, we will explore the difference between an offer (or offer letter) and a contract and how it affects your legal rights. We will also take a closer look at what it means for terms of an offer to be “legally binding”. 

Legal Difference Between an Offer and a Contract in Business 

An offer, in legal terms, is the mere expression of willingness by one party to enter into a contract. However, an offer alone is not legally binding until it has been accepted. This means that one party cannot sue or take legal action against the other party just because it is dissatisfied with the terms in the offer.  

At this point, neither party has the legal obligation to perform the contract until the other party accepts it. Before the offer is accepted, the parties are generally free to refuse, make counteroffers, seek clarification or re-negotiate the terms of an offer without any legal consequences.  

On the other hand, a contract is a legally binding agreement that both parties have accepted and agreed to perform. It outlines the responsibilities of each party and the consequences of failing to fulfil the obligations stated therein. Failure to fulfil the obligations stated in a valid, legally-binding contract can constitute breach of contract and lead to potential claims. 

Once an offer has been accepted and the acceptance has been communicated, it generally becomes a legally binding agreement—this means, if one party fails to perform their side of the contract, the other party could take legal action against the non-performing party (in the absence of any further agreed variation of the contract) 

To constitute a legally binding contract, certain elements must be fulfilled. These elements generally include: 

  1. Offer: One party makes a clear and specific proposal. 

  2. Acceptance: The other party agrees to the terms of the offer, such as by signing the agreement. 

  3. Communication of Acceptance: The acceptance is communicated to the offeror, such as by sending back the signed agreement. 

  4. Consideration: Usually, the contract must involve the exchange of something of value, such as money or services in exchange for the performance or promise within the contract. 

  5. Intention to Create Legal Relations: Both parties must have intended for the agreement to be legally binding. In the case of agreements of a commercial nature, there is a presumption that the parties did intend to create legal relations. 

*Please note however, that the laws of contract can differ from jurisdiction to jurisdiction. If you have any questions about a contract, please seek independent legal advice.  

Employment: How are Job Offer Letters are Different from Employment Contracts 

In the context of employment, job offer letters and employment contracts are usually two separate documents used during the hiring process, which is the case for majority of the jurisdictions around the globe except for the US. 

Employers and HR professionals may often send a job offer letter to a candidate with the aim to quickly tie them in before another job offer comes their way and snaps them up.  

Offer letters tend to be quite short and only contain the essential terms of the job, such as start date, salary, benefits and details of the position. Many of the details are often left out. The purpose of the job offer letter is usually to save time and confirm both parties’ intention to enter into an employment relationship as soon as possible—HR professionals might need more time to iron out the details, whilst candidates may move on if they do not soon receive a response from the company. 

Many candidates may be tempted to quickly sign a job offer as a ‘backup’, whilst they continue with their job search. Once they secure a better employment opportunity, can they refuse to take on the job accepted? 

The answer is: it depends. If the job offer letter leaves out important details, such as your salary, then it is likely not a binding offer—in this case due to lack of consideration. If the job offer becomes a legally binding agreement as all the elements of a contract are fulfilled, refusing to perform the job offer accepted technically may constitute breach of contract, which entitles the other party to remedies. It is noteworthy though, in some jurisdictions, employment relationship is established by facts, i.e., from the point when the employee has actually started providing services to the employer, rather than conclusion of a written document. Therefore, often the case the non-breaching party can only claim reliance liability against the party which declines/revokes the accepted offer.  

What is certain, is that a job offer is not legally binding until the offeree accepts it and the acceptance is actually communicated to the offeror. 

Hence, if you receive a job offer letter and you are not satisfied with what is stated in the terms, it is important that you read it carefully word for word, and do not sign it hastily. Instead, you may wish to ask further questions or separately negotiate the terms with the employer, or clarify the details of what the employment contract would entail. It is helpful to ask for a copy of the full employment contract and the handbook so you can fully assess what to expect in the role.  

In conclusion, understanding the different legal implications of offers versus contracts is vital for businesses, and for employers to establish clear relationships with employees. While an offer represents the willingness to enter into a contract, it is the acceptance and fulfilment of the necessary elements of a contract that create a legally binding agreement.  

Employment Law Compliance

Ensuring compliance with employment law is crucial for both employers and employees, and understanding the differences between job offer letters and employment contracts is an important first step. On August 1, 2023, Atlas is hosting a 60-minute webinar titled "Navigating Employment Law Compliance with EOR Solutions" to guide organizations through best practices, legal requirements, payroll management, worker classification, and more, providing professional insights to help organizations achieve compliance in today's remote work era.

This is an excellent opportunity for HR professionals to further their knowledge and gain valuable insights to stay on top of employment laws and regulations. Click on the registration link to get more information about the webinar and secure your spot.

*Disclaimer: It is important to note that the legal effect of an offer and a contract may vary across countries and regions. This article provides general information and does not constitute legal advice. It is recommended to consult with legal professionals to address specific legal concerns related to your business.