The Dotted Line
What you need to know about contracts and your business
Contracts are the glue that binds all our business lives and activities together. In fact they are part of everyday life – we all enter into contractual agreements far more often than we think – every time we accept terms & conditions from another party or agree to provide a service to someone on or offline, we enter into a contract.
Whether you are agreeing to supply goods or services in exchange for payment some other reciprocation, or are the one doing the paying in return for something provided by another party, it’s as well to understand what you are doing and what constitutes a legally binding contract.
The bare bones
A contract is a legally enforceable agreement which gives rise to new rights and duties among those who agree to its terms. Enforceable contracts have 5 key elements and can only be considered legally binding if they all exist and coincide. In very basic terms these are the 5 elements:
An offer is a promise by one party to enter into a contract on certain terms. It must be:
- Capable of acceptance.
- Made with the intention of being bound by acceptance.
Therefore, an offer must contain the basic terms of the agreement and evidence an intention that no further bargaining is to take place.
Acceptance is final and unqualified assent to an offer. It is made in response to an offer and to be effective in creating an enforceable contract it must correspond exactly with the terms of the offer with no variation of the terms.
If you suggest some kind of amendment to the terms of the offer then you are making a counter-offer and that will need to be accepted by the other party.
Acceptance must be communicated. The general rule is that an acceptance has no effect until it is communicated to the offeror. This is the point at which the contract comes into being.
In contract law this term refers to something of value that is exchanged between the two parties. In other words, one party supplies something and the other party pays, or otherwise agrees to supply something else in return for it. That exchange is
the essential reason for the contract existing. Without this component you are talking about a gift, not a contract.
Intention to create legal relations
This means that both parties consciously intend to enter into a contract that is legally binding and to abide by the terms and consequences laid out. This is generally straightforward where two businesses are entering into a contract but might be called into question if there was a dispute about the legality of an agreement made over drinks at a party for instance.
Certainty of Terms
A contractual agreement must be clear and precise to be legally binding. This is why contracts are full of definitions- a great deal of “lawyer speak” in a contract document is there to ensure Certainty of Terms. If things are left vague, or even open to interpretation, you may find yourself at a disadvantage if any dispute arises.
Reviewing a contract
Legal contracts typically contain a great many clauses that are full of headache-inducing jargon.
But if you are going to ink the deal you really must get through it because every contract involves you in obligations and responsibilities so you had better know what they are, whether you can meet them and if in fact you are prepared to accept them.
It’s very hard for a non-lawyer to cover all bases and to recognise potential problem areas and this is where professional legal advice is often necessary. However, it helps a lot, and keeps legal costs down, if you know what you are looking for, what should be there and when to ask questions. Let’s take a look at the basic elements you need to be alert to:
Who exactly are the parties to the contract? When a contract from another business or individual arrives on your desk for review you should be first of all checking that you are doing business with the person or entity that you expected to be. What do you know about them? Do they have the authority to sign this? Are sub-contractors involved in the execution of the deal? What if there is a change of management or ownership at either company? Who inherits the other party’s obligations if anything happens to the individual who is signing?
What is being promised? Look carefully at the exact description of what is being offered – that goes whether it is you doing the offering or if something is being offered to you for which you will be agreeing to pay or otherwise reciprocate.
Pay attention to dates and deadlines. When is delivery to be expected and what provisions are there if there is any delay in that? What responsibilities do you and the other party each have in achieving that? The supplier might have clear responsibilities but if you are the recipient of the goods or services you might also have responsibilities to provide information, access or tools in order for them to do that and the contract may state when this must happen by.
When do payments have to be made?
How long is the contract in force and are there any scheduled dates for renewal? If so make sure these are in your diary.
What are the agreed sums of remuneration and are they what you were expecting? Are there any penalties (for late payment or failure to supply your part of the bargain for instance)? Are tax and delivery included in the stated sum or to be surcharged?
IS IT TRUE?
If the other party is making assertions or representations in the contract, for instance about their capacity, authority and competence to deliver what is agreed or to maintain their side of the bargain, are you sure this is true? Are they providing a warranty? A warranty is a promise to compensate if anything they have asserted to be true and achievable is later shown not to be.
WHAT ARE YOU PROMISING?
Whether you are the buyer or the supplier, a contract will usually place a legal responsibility on you to fulfil your side of the bargain. Before you sign make absolutely sure you are able to fulfil any responsibilities the contract imposes upon you. If your responsibilities are ongoing, how long for? Take extra care on this one, as the other party’s rights and your responsibilities may be scattered throughout the document. You should also make sure the contract states what you are not promising, for instance a particular outcome for their business as a result of your services.
WHAT HAPPENS IF SOMETHING GOES WRONG?
What constitutes a breach of this contract? What happens if this occurs and what remedies are available to you in these situations? What happens if something agreed to needs to be changed, or if for some reason it is necessary or desirable to terminate a contract due to circumstances beyond either party’s control? What obligations do you have to meet the other party halfway and when do they apply? Is there a limit to your liability, and/or the other party’s?
Do’s and Don’ts
- Read everything carefully, even if you have legal support.
- Fill any blank spaces in the contract to prevent additions post-acceptance.
- Don’t play ball if the other party tells you “It’s just a standard agreement”. If you hear this it should be an alarm bell and you should read the document extra carefully.
- Don’t be pressured, take your time.
- Ask questions, don’t be intimidated or embarrassed to ask for something – anything – to be clarified and if you are not satisfied by, or don’t fully understand the answer ask again or get legal advice.
- Watch out for extra documents such as Letters of Comfort, Heads of Agreement, Heads of Terms as well as pre-contract documents such as letters of intent, memoranda or understanding and any letters, emails or draft agreements which are marked “subject to contract”
- Do not supply goods, allow access or begin services until the agreement is finalised and any pre-conditions (especially payments!) met. It’s not just a question of payment though, if you or your staff are working on a client’s site, relevant insurances may not be valid until the contract comes into force.
- Alert your staff to the fact that a contract can be accepted (and thereby become legally binding) by behaviour – for example, performance of services.
- Do not accept an offer unless you are able to give FULL AND UNEQUIVOCAL agreement. Don’t leave grey areas open or allow a situation where “details can be sorted out later”. They can’t, after acceptance, whether by signature or behaviour, it will be too late.
- Ensure that your offer or counter-offer has been accepted – not just received. For example, if you were to send over a contract that had been agreed in every respect except for the final acceptance by the other party on a Friday afternoon, but they did not receive the email or letter till their return to the office on, say, Tuesday, you would not want to have ordered goods required for the performance of your side of the bargain in the meantime. It’s an easy mistake that could leave you out of pocket.
- If in doubt, any sort of doubt, call in professional legal advice.
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