Businesses might have a contract/agreement with another business, an employee, a customer, a supplier or a vendor. The workplace procedures in relation to this include:
•clarify the terms for a customer/client ending a contract early without penalty.
•confirm the total value of the contract.
•understand the obligations of both parties, including timeframes and payments.
•write a procedure to follow when one party seeks to claim damages.
•state reasons for termination of the contract by either party and the notice to be given, and any penalty that may apply.
•clarify and confirm the payment/compensation to be paid to either party in return for services.
•understand the schedules attached to the contract.
•ensure the contract does not include unfair contract terms in a standard form, where the business has had little or no opportunity to negotiate with the supplier/trader
A contract may be simply defined as a promise or set of promises which the courts will enforce. Contracts form the foundation of all business. The contract may be either:
- Simple (oral or written)
- Formal (i.e., one contained in a legal document)
By the end of this chapter, you will understand:
- The legal significance of contracts
- Offer and acceptance
- Voluntary consent
- The contract checklist
- Legal advice
To have any legal significance a contract must have:
- Intent of business to be undertaken
- Agreement and consent from both parties
- Meeting of legislative requirements
- Legality of any other objects
Only valid contracts are legally enforceable.
Serious Intent
Both parties must have the intention of being bound by their agreement to meet their obligations. This requirement is satisfied if both parties say, verbally or in writing, that they intend to be legally bound by the contract. Many written contracts, for example, begin with the words ‘The parties intend to be legally bound by this agreement.’
Offer and acceptance are at the core of any contract. A valid contract requires offer and acceptance to reach agreement. A person making an offer is called the offeror whereas the person or entity to whom the offer is made is called the offeree. If the offeree accepts the offer, there is an agreement. A contract is made at the time of acceptance, that is, when the offer is accepted.
Offer Rules
An offer is initiated by one party wanting to enter a contract with another party on specified terms. In any sales transaction, for example, the offer can be initiated by either the seller or the buyer.
An offer is not the same as an invitation to make an offer.
Invitations to make offers include:
- Placing goods for sale in a shop window or on a shelf
- Listing goods for sale in a catalogue
- Listing goods or services for sale in an advertisement
- Displaying goods or services for sale on a website
In typical self-serve shopping situations, customers make the offer to buy goods from businesses.
Displaying goods by a business is a tactic invitation or enticement for potential customers to buy them. When a customer takes their selection to the point of sale, they are then offering to purchase them.
If the business accepts the offer, the transaction takes place. This equals a legally binding contract.
Acceptance Rules
The agreement (contract) is made at the time of acceptance. Acceptance could be communicated in person (verbally or by conduct), or by telephone, fax or email. The offeror, however, can specify another form or manner of acceptance.
Consideration
Consideration basically involves giving something for something. This could be an exchange of promises or an action in return for a promise.
Example
You offer to sell your motorbike for $10,000 to Kim, who accepts your offer. The consideration you provide to Kim is the promise to sell her your bike for $10,000. In return, Kim’s consideration to you is the promise to buy your bike for $10,000.
There is no voluntary consent if any of the following occur:
| Common mistake | For example, Amrish and Mark enter into a contract for the sale of a car, but unknown to both, the vehicle was stolen or destroyed at the time the contract was made. |
|---|---|
| Misrepresentation | A party enters into a contract by relying on a false statement made by the other party before the contract was made. |
| Duress | One party is forced into the contract by the use or threat of violence. |
| Undue influence | A dominant party uses their position of power to influence a weaker party to enter the contract. |
| Gross unfairness | The negotiation process or negotiated terms of the contract are grossly unfair to one of the parties. |
In most of these above situations, the party who did not provide voluntary consent has the option of avoiding (getting out of) the contract.
Capacity of Parties
Not all people have the legal capacity to enter into contracts.
These persons include:
- Minors (anyone under 18 years of age)
- People with a mental disability
- Undischarged bankrupts
- Was there a clear offer?
- Was there a clear acceptance?
- Was the agreement complete?
- Was there consideration and intention?
- Did both parties have capacity?
- Is the contract compliant with legal and industry requirements?
- Are the express and implied terms valid?
- Was there any duress or unconscionable conduct?
Damages are the main common law remedy available for breaches of contract. The breaching party is sued by the other party to the contract for any losses arising from the breach. Losses claimable could include loss of income, property losses or extra costs incurred.
A valid contract is a contract in which all elements are present and it is enforceable by law. A void contract is one which is not legally binding.
A voidable contract is a contract one of the parties is entitled to rescind (i.e., not be bound by the contract). This right is usually given to the injured party.
An unenforceable contract is one in which the main elements are present, but some kind of technicality or issue may render it impossible for the contract to be fulfilled.
An illegal contract is one in which the aim of the contract is not legal, in regards to common law or statute.
As we have mentioned several times, the world of creating, negotiating and agreeing contracts can be fraught with danger. This cannot be stressed enough, if you want to be sure that what you are doing is legal, fair and watertight, you MUST engage a legal contracts expert to deal with this important area of your business.
This will not only give your business a level of security in its dealings, but will give you the peace of mind that your contractual obligations and promises can be dealt with, leaving you more time to take hold of the day-to-day operations of the organisation.
Watch
The following video, produced by Design by Laney, explains contracts for entrepreneurs and new businesses.
10 Reasons You Need a Contract as an Entrepreneur
Use the following questions to check your knowledge.
- Explain what is meant by a ‘contract.’
- Explain the difference between ‘offer’ and ‘acceptance.’
- Describe ‘voluntary consent.’
- Describe ‘capacity.’
- Discuss and explain why legal advice is so important.
