What's your contractual relationship status? It's (not) complicated...

Whether you’ve been in business for years, or days, contracts are a fundamental part of commercial life. Even if they’re not always enforced, they are a powerful tool to ensure that expectations are aligned and key stakeholders are aware of their various rights and obligations. Having both parties formally agree to these means that a commercial relationship has a higher likelihood of achieving its aims.

Many people have an intuitive awareness of how contracts form, but there are some traps to be aware of. For example, people are frequently surprised when told that contracts can be verbal or that a written contract may not be a “contract” (in a legal sense) if the essential terms are too uncertain. So what are the key ingredients of contract formation? Let’s try to represent it in a diagram:

  1. An offer can be defined as a promise to do something (or not to do something) on specified terms which can be accepted by another party. An acceptance is an unqualified consent to the terms of the offer. In other words, the acceptance must “mirror” the offer. If a purported acceptance contains new terms, it is a counter-offer (which extinguishes the original offer) and not the acceptance of the original offer.

  2. Consideration simply means that each party gives something of value (for example, services) normally in exchange of getting something of value (for example, money).

  3. The essential terms of the contract must be sufficiently certain and complete for the contract to be legally binding. The essential terms are matters that go to the heart of a contract, such as the services being provided and price payable for them.

  4. The intention to create legal relations is exactly what it sounds like, i.e. whether the parties intended to enter into a contract. The trick, however, here is that such intention is determined objectively by looking at the language of the relevant agreement and surrounding circumstances. Courts cannot and do not enquire into people’s minds to see what they may have subjectively intended.

While many business people are still happy to transact based on promises and handshakes, nothing beats a concise and precise written agreement, where rights and responsibilities are stated explicitly and agreed upon – even if it’s on one page. Although it takes some extra time at the outset, the risk of something going wrong (resulting in hours spent on the ‘paper trail’ trying to prove the existence of a contract using emails, text messages and meeting notes) is worth mitigating.

Since we think contracts are such an important and regular part of commercial life; preparing, reviewing and negotiating any contract is included in every Source Legal Online unlimited legal services monthly subscription.

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