Every day businesses enter into new relationships. And for our economic system to work, businesses of all types have to be able to trust in the agreements they make with others.
Whether it’s a supplier or customer, your employees, contractors, or any other business partner – every company needs to know that the other party will keep its side of the bargain.
That’s why contract law has developed over the years. The parties can turn their agreements into legally binding contracts and know they will be enforceable in the courts.
In this article, we look at what you need to know when thinking about your contracts.
What is the difference between an agreement and a contract?
An agreement simply refers to a common arrangement or understanding between the parties. By itself, an agreement might not be legally binding – because the parties don’t intend it to be so.
Example: The driver who delivers the stock to a retail store each week might agree that she will call the store owner ten minutes before arrival, so the owner can meet her at the back door. This is an informal agreement. They don’t intend for it to be legally binding.
A contract is an agreement that the parties do intend to be legally enforceable. This intention might be obvious (for example, because it is expressly recorded in a document that they have both signed) or it might be implied from their actions or the circumstances.
Example: The store owner contracts with the supplier to deliver new stock to the store each week, that the products will arrive in good condition and the store owner will pay the supplier within seven days of delivery. The parties do intend for these obligations to be legally enforceable.
What are the elements of a contract?
For the courts to treat a contract as enforceable, the following elements must be present:
- Offer – one person promises to another to enter into a contract on certain terms.
- Acceptance – the other person decides to accept that offer.
- Consideration – both parties are agreeing in their arrangement to exchange something of value, such as money, goods, or services.
- Intention to be legally bound – both parties intend for the arrangement to be legally binding.
Several other factors can also be considered when deciding if the parties have a binding contract, such as:
- Whether the parties have legal capacity to enter into the contract (for example, that a party was not under duress or the influence of drugs or alcohol at the time of making the contract).
- Questions about whether a person has sufficient authority to enter into the contract (for example, whether a person is authorized to sign on behalf of an organization).
- Whether the contract is for an illegal purpose or involves illegal conduct.
If you would like to learn more about legally binding contracts, we have an article on that, too.
Does a contract need to be in a specific form?
Contract law exists to facilitate trade and commerce, by making sure that parties keep their promises. Except in some specific scenarios, the form that the promises take is usually less important than their substance.
This means that a contract agreement can exist in different forms:
- Oral. A binding contract can be created orally – in person or on the phone. The problem with this approach is that it can be difficult to prove later what the agreed terms were (or, in fact, that a contract was concluded at all!)
- Written document. This could range from a quick and simple few lines of text to a much longer and heavily negotiated document. The terms of the contract might also be split across multiple documents (as is the case with a Master Services Agreement and each Service Order).
- Deed or contract under seal. Some written contracts are more formal and are “signed under seal”.
- Conduct. The existence or terms of a contract might be implied from the parties’ conduct (or from their past behavior, or
- Electronic. A contract can be concluded electronically. Examples include an exchange of email, clicking a button on a website (known as a clickwrap contract), or simply continuing to use a website service after the user is notified of the terms and conditions (a browsewrap contract).
It’s even possible that the contract terms could be based on any combination of these different forms.
What should go into a typical contract?
Once the parties have decided that they would like to make their agreement binding and put in place a written contract, they have to consider what terms to include.
There is a trade-off to be made here. A good contract will be drafted and as unambiguous as possible. Ideally, nothing would be left to chance. However, it will be expensive (in terms of time and resources) to consider and negotiate terms for every possible scenario that might occur. That might make sense for a high-value or strategically important project, where the stakes are high. On the other hand, the time and expense might not be warranted if the subject of the contract is just not that valuable.
The focus of contract discussions will therefore tend to be on the issues that the parties want to know are covered off, or, from experience, that tend to be the most likely to cause dispute.
- The products or services that are being supplied, including:
– A description or specification for the products.
– Delivery requirements.
– Service standards and service levels.
- The price to be paid.
- Payment terms, including invoicing arrangements, payment due dates, and interest for late payment.
- Liability requirements, including exclusion and limitation of liability clauses or indemnity provisions.
- Dispute resolution processes.
- The duration (or “term”) of the contract and situations when the contract can be terminated.
For more information on contract clauses, go read our article just on that.
What are some different types of contracts?
There are several different ways that contracts can be categorized.
Bilateral versus Unilateral
A bilateral contract is what we typically have in mind when we think about a contract, where there has been a mutual exchange of promises (for example, Party A promises to deliver goods and Party B promises to pay for them).
In a unilateral contract, on the other hand, one party makes an express promise or performs an action, without having secured a reciprocal agreement from the other party. Instead, the offer can only be accepted by the other party performing a specific act. A typical example might be a poster advertising a reward for the safe return of a lost pet. This offer, of a reward, is “accepted” by any person who performs the act of finding and returning the pet.
Executory versus executed
An executory contract exists where the parties agree now on terms that will be performed (or “executed”) later. An executed contract is a contract where the contractual promises have already been fulfilled or where the performance takes place at the time the contract is entered (for example, the purchase of a product in store).
Standard contracts versus contracts under seal
Some contracts are entered into “under seal” (contracts of this type are also referred to as “deeds”). This is a more formal approach, where the contract must be in writing and be “signed, sealed and delivered”. Contracts of this type are used where the parties want it to be clear that their promises are intended to be binding, even if there might be some doubt as to whether there has been an exchange of consideration. As we saw, “consideration” would usually be one of the vital elements for there to be a binding contract.
As you go about the day-to-day business of reviewing and agreeing on new contracts, it’s always useful to come back to these basic principles of what is involved in a contract agreement – to help avoid the types of mistakes that can lead to major problems later on.
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