The Basis of Contracting
What is Contract?
A legal document that states and explains a formal agreement between two different people or groups, or the agreement itself.
What Is a Legal Contract?
A contract must have a legal purpose to be enforceable. For example, Steve hires Paul to kill Susan. Steve drafts an agreement outlining Paul’s responsibilities, namely to acquire a gun and shoot Susan in the head. The agreement also specifies the amount Steve will pay Paul once Susan is dead. A contract of murder for hire is illegal. If Paul fails to fulfill his obligations under the agreement, Steve will have no recourse against Paul. The agreement Steve has drafted is unenforceable.
All parties to the contract must have reached a “meeting of the minds.” That is, one party must have extended an offer to which the other parties have agreed. For example, Jim signs a contract with Tom’s Tree Trimming. The contract outlines the scope of the work Tom will perform on Jim’s property. Jim and Tom have a mutual agreement regarding the work that will be done.
Each party to the contract must agree to give up something of value in exchange for a benefit. For example, you hire an independent contractor to repave your driveway. You and the paving contractor sign an agreement in which you promise to pay a sum of money in exchange for the paving work. Both you and the contractor have agreed to give up something of value. You have agreed to pay money, and the contractor has agreed to perform the paving work.
The parties to a contract must be competent. That is, they must be of sound mind, of legal age, and unencumbered by drugs or alcohol. If you enter into a contract with a minor or an insane person, the contract will not be enforced.
Genuine Assent. All parties must engage in the agreement freely. A contract may not be enforced if mistakes have been made by one or more parties. Likewise, a contract may be voided if one party has committed fraud or exerted undue influence over another. For example, you sign a contract in which you agree to sell your house to your next-door neighbor for $1. When you signed the contract, your neighbor was pointing a gun at your head. Clearly, you made the agreement under duress, so the contract is not valid.
Some types of contracts must be in writing. An example is a contract in which you agree to sell your property to someone else. Real estate sales contracts must be written in order to be enforceable.
What is a business contract?
A business contract is a legal agreement between you and another party, and may be used in situations where services are rendered for a fee or specific duties are required to be performed. To be legally valid, a contract must contain several key elements.
In addition to being clear and specific, a contract must meet certain criteria to make it legally enforceable. A legally enforceable contract can be used in court to support a decision on a disputed item. If a contract does not have certain essential ingredients, it is not legally enforceable.
Most contracts never see a courtroom and they could easily be verbal unless there is a specific reason for the contract to be in writing. When something goes wrong, a written contract protects both parties. If one party to a valid (enforceable) contract believes the other party has broken the contract (the legal term is breached) the party being harmed can bring a lawsuit against the party who it believes has breached the contract.
Essentials of Business Contracts
There are six required, essential elements for a contract to be valid (enforceable by a court). The first three, considered here together, relate to the agreement itself, and the other three relate to the parties making the contract.
Offer, Acceptance, and Mutual Consent
Every contract must include a specific offer and acceptance of that specific offer. Both parties must consent to their free will. Neither party can be coerced or forced to sign the contract, and both parties must agree to the same terms. Implied in these three conditions is the intent of the parties to create a binding agreement. If one or both parties are not serious, there’s no contract.
There must be something of value exchanged between the parties. The thing of value may be money or services, but both parties must give something (otherwise, it is a gift, not a contract).
Both parties must be of “sound mind” to comprehend the seriousness of the situation and understand what is required. This definition requires that neither party be minors, both must be sober (not under the influence of drugs or alcohol when signing the contract), and neither can be mentally deficient. If one party is not competent the contract is not valid and the non-competent party can disavow (ignore) the contract.
The contract must be for a legal purpose. It cannot be for something illegal, like selling drugs or prostitution. Remember that it is not illegal to enter into a contract that doesn’t have all of these essential items; it just means that if an essential is missing the contract cannot be enforced by a court.
When a Contract Must Be in Writing
As noted above, verbal contracts can have the force of law, but some types of contracts must be in writing, like long-term contracts and contracts for marriage (pre-nuptials). There is also such a thing as an implied contract. You can unknowingly enter into a contract with someone and be forced to abide by its terms.
Principles of Good Contracting
It is advisable to have a written contract to ensure clarity, however there is no legal requirement for a commercial contract to be in writing – it is still enforceable if it isn’t written down, although of course much harder to evidence what has been agreed and there is a greater chance that terms you do not want will be implied into the contract. A contract is only properly formed when there is an offer, acceptance of that offer, intention to create legal relations and consideration between the parties.
In most contracts, parties are free to contract on the terms that they agree. It is always advisable to have a clear operative part to your contract, setting out clear performance and payment obligations, limitations and exclusions, detailing how risk is apportioned between the parties and the limits of liability of one party to another party as well as termination rights. Certain “boilerplate” clauses are important (e.g. non-assignment of rights and which law and jurisdiction the agreement will be subject to) so these clauses should not be ignored.
Why do we use contracts?
You want to sign a contract?! Why on earth do we need to sign a contract? Can’t we just do this on a handshake? Can’t I trust you?
Well, you could but both parties are leaving themselves wide open for potential hassles that a signed and agreed upon contract would eliminate. If you feel nervous asking your clients to sign a contract, consider these points:
Contracts provide a description of responsibilities. Rather than suffer through the confusion of wondering what each party’s responsibilities are, you’re better to have everything in writing. This will help avoid confusion or disagreement.
Contracts bind parties to their duties. It is incredibly disruptive if one party attempts to back out of an agreement. A contract will bind the parties to the previously defined description of duties eliminating this problem.
Contracts can establish a time frame for duties. If you need work performed and performed within a certain time frame a contract binds the party to that time frame. As a consultant, you might want to require the other party to provide adequate and timely access to key personnel, for example.
Contracts can secure payment. No one likes to be stiffed for work performed and a binding contract provides a written legal document establishing an agreement to be paid for services rendered.
Contracts provide recourse when the relationship falters. If the relationship between the contracted parties deteriorates, a contract outlines the previously agreed upon steps required for dissolving the relationship without punitive measures.
Key steps in the creation of a Contract :
Creating a contract requires several necessary elements. Each step involved in creating a contract ensures the rights of all parties are protected.
The first step in creating a contract is to have intent. Intent is the desire between two or more parties to enter into an agreement with one another. For example, two friends who intend on going into business with each other sign a partnership agreement to legalize the business relationship.
Once two parties set the intention to enter into a contract, one party must make an offer to the other to perform a duty or provide a service. For instance, a buyer makes an offer to a seller to purchase a home. It is important to note that although one party makes an offer, a contract cannot exist until the other party accepts the offer.
- Time frame
When an offer is made, it does not extend indefinitely. When creating a contract, the offering party must stipulate how long the offer will remain valid and how long the other party has to accept the offer.
To create a contract, the document or agreement must describe the obligations of each party. In other words, the contract must define the duties one party is obligated to perform and how long he has to perform them.
Representations must exist in a valid contract. A representation is a statement of truth regarding the subject matter of the contract. For example, an individual selling a vehicle to another party “represents” that he is the rightful owner and has the legal authority to sell the vehicle to the buyer.
Consideration must exist to create a contract. Consideration is what one party receives from the other party once the obligations of the contract are fulfilled. Consideration can be in the form of money, products, services, expertise or anything that is considered of value.
If disputes arise between the parties, the contract should include how each party will resolve the dispute. Many contracts include an arbitration clause which stipulates that each party must utilize arbitration, instead of litigation, to settle a dispute.
The final and perhaps most important step in creating a contract is acceptance. A contract is only valid if the accepting party agrees to its provisions. A party can accept a contract verbally or in writing depending on the nature of the contract. If entering into an oral contract, each party must verbally agree to the terms for a legally binding contract to exist. With a written contract, each party must sign a document to ensure acceptance of the terms.
Essential elements of a valid Contract
- Offers and Acceptance.
- Legal Relationship.
- Lawful Consideration.
- Capacity of Parties.
- Free Consent.
- Lawful Objects.
- Writing and Registration.
- Possibility of Performance.
- Not Expressly Declared Void.