22 November 2018

Contract essentials – what do I need to know?

People enter into contracts every day, ranging from complex business and property deals, to simply doing their weekly supermarket shop. But they should be careful to think about the right legal basis for a contract and the right approach to entering into that kind of commitment. Here we offer a few helpful hints on how to formalise your contracts, which will be important if things go wrong or fall into doubt. 

The legal requirements for a binding contract

  • AGREEMENT – this is typically established when one party makes an offer which is then accepted by the other party.
  • CAPACITY – all parties to a contract must be able to understand the terms, rights and obligations conferred by the agreement. This means that children under 18, people suffering from severe mental health conditions and those under the influence of drugs or alcohol will not be able to enter into certain contracts. All parties must freely consent to the contract being formed and not be coerced or unduly influenced into doing so.
  • CONSIDERATION – the parties must exchange something of value (known as ‘consideration’) for a contract to be binding. This is most often a promise to do something in the future, or a promise to pay something of economic value. The consideration merely has to be sufficient – it does not have to be adequate or for the other party’s benefit.
  • INTENTION – everyone must intend to enter into a legally binding contract. For this reason, parties to a business agreement are presumed to do so, but parties to social contracts are not. It is up to the parties to prove that they intended to enter into a contract.

Helpful hints

  1. Formalise the contract in writing
  • It is not necessary for all contracts to be in writing to be legally enforceable. An oral contract can still be a valid contract.
  • However, we recommend that you write down and get all parties to sign any formal agreement. This reduces risk and will remind all contracting parties what they have agreed.
  • If the parties disagree on the terms of a contract, it will be for a court to decide what those terms were or what they meant. This task becomes more straightforward where the terms are written down.
  1. Read the entire contract
  • You need to be clear about your rights and obligations as contained in the contract. As a binding legal document, you must appreciate the extent to which you are protected under the contract when certain things happen.
  • You should also ensure that the contract identifies who the parties are, what each party is expected to provide, and the deadlines for doing so.
  1. Attempt to negotiate if not satisfied
  • As a party to a contract, you have the right to alter its terms as long as all parties agree to it. If you are not satisfied with the rights and obligations conferred by the contract, you should propose your preferred terms in order to reach consensus.
  • You should note that any attempts to negotiate a contract are seen as counter-offers, rather than your acceptance of the existing contract. By negotiating, you are not legally accepting the terms of the contract as proposed.
  1. Agree on a way to resolve disputes
  • If a dispute arises, bringing a claim in the civil courts can be expensive and time-consuming. Moreover, issuing court proceedings in the event of a breach of contract is likely to be fatal to any working relationship you have with the other party.
  • The use of an alternative dispute resolution term means that parties are encouraged to discuss any disputes arising before suing each other. This could be in the form of a round-table meeting, or by using an impartial mediator to propose a course of action towards resolution.
  • You should also state which country’s law applies to the contract.
  1. Be clear on how to end the contract
  • If either party is unhappy with how the other is performing its contractual obligations, or simply wants out, the contract should clearly state how and when the contract can be terminated and the consequences of doing so.
  • You must always provide for a written notice of termination to be sent from one party to the other to legally end the contract – this provides certainty.

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About the Author
Marc Lazarus, Partner
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