An entrepreneur’s guide to understanding contracts.
Starting a business can be an exhilarating and marvelous milestone in life. Entrepreneurs are usually occupied with ensuring their idea, service or product is ripe and ready for picking (metaphorically of course – unless you’re starting a fruit and veg business) by their customers or clients.
Often, up and coming business owners tend to neglect ensuring their contracts are drafted impeccably to cover various situations that could arise in the future. A lack thereof has often led to: conflict and dispute, unnecessary time spent attempting to resolve the problem and even worse – litigation.
What Exactly is a Contract?
Is a contract simply the act of signing on the dotted line no matter the terms contained? Are terms written on a napkin in a restaurant effective and enforceable?
A contract is essentially an agreement that is enforceable by law. It details the rights and duties that each party owes to the other. The formation of a contract transpires when:
1. An offer has been made
2. The offer has been accepted
3. The offer is accepted for a consideration
4. Both parties have an intention to create legal relations
5. The terms of the contract are certain
Each of these aspects to the formation of a contract are worth exploring to gain a better understanding of the legally binding nature of contracts and their impact on your business.
An offer is a promise to enter into an agreement with a party based on certain terms. An offer itself does not bind an individual.
An offer must be:
(iii) capable of acceptance; and
(iv) made with the intention of being accepted.
It is important to note that an offer can be terminated if there is a lapse of time, if the offer has been withdrawn, if the offer has been rejected, if a condition upon which the offer had been made no longer exists, or upon death of the person making the offer.
Acceptance of the Offer
Acceptance is as self-evident as it sounds: it entails accepting the terms of the given offer. Acceptance takes effect once it has been communicated to the customer or client. This can be done verbally, in writing, via email or on the phone.
Consideration is anything that is to be given in exchange for a promise to do something i.e. ‘I will provide a box of exotic fruit in exchange for £25’. Here the £25 would serve as the consideration for the offer to provide a box of exotic fruit. Consideration is essentially the enforcement of the promise, and without this, a contract cannot be legally binding.
There are 3 types of consideration to note: a promise to do something, a promise not to do something and a promise to pay money.
Intention to Create Legal Relations
A contract cannot be created if both parties do not intend to create a legally binding agreement. However, with respect to business dealings, an intention to create legal relations is normally presumed.
Certainty of Terms
Without certain terms and conditions, contracts may be unenforceable. It is, therefore, crucial that the terms drafted into your agreement are not vague or ambiguous, but are certain and complete.
As a business owner, you should take great care to ensure the terms of your agreement are sufficiently clear to allow the meaning of those terms to come into effect and be understood. Failure to do so can negate the effectiveness of your contract and result in the courts deeming it unenforceable.
No matter your course of business, ensuring that you have effective and binding contractual agreements in place is pivotal. Many a time have businesses fallen into the pricey pits of litigation trying to resolve problems that could have been avoided had they implemented a clear and concise contractual agreement.
Please note the above is a simple explanation of the elements of a contract. For a comprehensive understanding of what terms and conditions your business requires, please contact one of our commercial solicitors today for a consultation.