I would like to start by stating that a contract is an agreement voluntarily entered into by two or more parties. This is with the intention of fulfilling an obligation binding them legally (Fruedwald 2009). In most cases, contracts are written. However, there are exceptional cases where contracts are made orally. Being a legally enforced promise, there are consequences when the contract is breached. The consequences may take the form of ‘damages’ and compensation which may be monetary or which can be settled using anything else agreed upon by the parties. You are thus advised to only consider entering into contracts that you can honor to cushion yourself against possible lawsuits. Entering into such contracts will also protect you against losses incurred from the compensation for ‘damages’.
Key Elements of a Valid Contract
For a contract to be considered valid and legally binding for the two parties- and for it to be fully recognized and acknowledged by the parties involved- it must have some key elements. These elements include the ones I will highlight below:
Offer and Acceptance
An offer can be defined as the manifestation of intentions by one party to make a contract with the other one (McKendrick 2005). The party who manifests the intentions is referred to as the offeror while the party to whom the intentions are made known is referred to as the offeree. An offeror can withdraw the offer at will as long as the offer has not yet been accepted (Atiyah 2002).
Intentions to be Legally Bound
It is important for you to understand the fact that a contract does not exist simply because there is an agreement between the concerned parties. Both the offeror and the offeree must be willing to enter into an agreement that is legally binding (Willmolt & Dixonr 2009). The purpose of the legally binding agreement is to make it recognized by the law.
Consideration can be described as the price paid by one party to the other. Such a price is not necessarily conceptualized in monetary terms. On the contrary, it can be anything of value such as an asset (Wehberg & Servanda 2001). However, it has to be agreed upon by the parties entering into a contract. Consideration consists of gains by one party in terms of profit, interests, or even rights.
Capacity to Contract
This refers to the ability of the parties to enter into a contract. You should ensure that the person you intend to enter into a contract with meets all the requirements, legal or otherwise. For a contract to be considered valid, both parties must be of sound mind and have the ability to make sound decisions (Willmolt & Dixonr 2009). Age is also of great importance. It is noted that contracting parties must be of legal age. The legal age differs from one country to the other. As such, it is important to familiarise yourself with the definitions of legal age in the country within which you are operating. The financial status of either of the parties may render one incapable of contracting in the event that they are found to be bankrupt or acting on behalf of corporations that are bankrupt. Prisoners are also incapable of entering into a legally binding contract with other parties.
Genuine Consent to the Contract
For a contract to be valid and legally binding, elements such as free will and a clear understanding of the terms by the contracting parties are of great importance (Atiyah 2006). The parties must therefore make an informed and free decision to consent to the terms of the contract. You should therefore check contracts for false statements, mistakes, undue influences, as well as duress.
Legality of Agreement
The contract should be formulated in line with the laid down laws and procedures that govern a people or a nation within whose jurisdiction the said contract is undertaken. The contract should portray integrity on the part of both parties (Welber et al. 2009). All settlements should be made using the right channels to avert conflicts between the contracting parties themselves or between the contracting parties and law enforcement agencies.
Parol Evidence Rule and its Exemptions
This is another important element of contracts. The parole evidence rule is a provision in contracts that prevents parties to a written contract from presenting evidence to contradict or add to the terms of the contract. This rule is operational in written contracts. Evidence arising from terms or agreements made in the past is not to be considered when interpreting the final written contract (Atiyah 2002). The rule is presumptive and is used by courts to interpret and determine the terms and contents of the contract.
The parole evidence rule may also apply to any extrinsic or oral evidence regarding the contract. This is especially so if that evidence does not constitute a separate legal contract similar to the final written contract between the parties in agreement (Willmolt & Dixonr 2009). However, the rule has exemptions. Below is an illustration of some of the circumstances under which parties may be allowed to admit and present any extrinsic evidence which may contradict or add to a final and integrated written contract:
- The extrinsic evidence can be admitted where the written contract is proved ambiguous and the evidence presented is to be used in interpreting the meaning of the contract.
- Evidence can be presented to fully identify parties to the contract. This is for instance when a party has changed names. This will help in proving that they are the same persons obligated and bound by the contract.
- A party to a contract can present extrinsic evidence to prove that the contract is null and void. The contract can be disapproved where evidence shows that a party to the contract was incapacitated or undue influence was applied on them.
- Mistakes in the final binding contract which occur as a result of misleading terms and erroneous information included in the contract can be corrected by the admission of clear evidence.
- A party to the contract can also present evidence to contradict the contract in the event that the agreed consideration has not been paid or conveyed as stated in the contract.
- It can also be presented to guide and aid the interpretation of terms already included in the written and final document. Where the meaning of some terms included in the contract is not clear, evidence can be admitted to facilitating their interpretation.
- Extrinsic evidence can also be accepted where the final written document was merely a part of the entire agreement.
- Evidence can be presented where the written document is not to be operational until some specified events take place.
The Importance of having Commercial Agreements in Writing
A legally binding commercial agreement can be written or oral. Written agreements are preferred over oral agreements since they can be produced and presented as evidence, thus reducing and solving disputes (McKendrick 2005). Commercial agreements are legally drafted for the following reasons:
A legally drafted agreement makes provisions for means of resolving and handling various situations. As such, it acts as insurance for the business. Disputes among business partners and disagreements may arise from certain terms and conditions included in the contract. In such cases, the written agreement can be produced to address disagreements, and as such protect the business from losing property (Fruedwald 2009).
The agreement should be very specific when addressing the rights of each party and the obligations to be fulfilled (Randy 2003). The terms specified in the agreement help parties manage their expectations.
Promotion of Good Business and Customer Relations
This is another reason why it is important to have written contracts. The presentation of a written agreement creates a positive impression on customers, investors, and business partners. The confidence of the customers and the investors is boosted by the contract.
The laws regulating commercial agreements may vary between countries and from one time to the other. As such, businesses should comply and draft legally applicable agreements and contracts (Randy 2003). Such a contract should adhere to the rules and regulations in the country.
Terms and Conditions of Standard Trading
A written agreement is used by traders to indicate their rights. These are rights such as compensation upon breach of contract, retention of goods if not fully paid, warranties, and payment for goods and services (McKendrick 2005).
For Particular Transactions
The drafted agreement should include specific details and particulars of given transactions. This is to maintain the relevancy of the goods or transactions between the contracting parties (Fruedwald 2009). This means that the importance of a binding contract to business persons cannot be downplayed.
A contract is a legally binding agreement and you should thus take great care before binding yourself to one. Failure to comply with the terms of the contract carries with it various repercussions. You can be taken to a court of law where you stand to lose a considerable amount of revenue in compensating the other party in terms of damages (Willmolt & Dixonr 2009). However, a contract can only be considered to be legally binding if the parties involved willingly agree to the terms of the contract, failure to which the contract can be nullified by a court of law.
Atiyah, P 2002, The rise and fall of freedom of contract, Clarendon Press, London.
Atiyah, P 2006, Consideration: a restatement in essays on contract, Oxford University Press, North Melbourne.
Fruedwald, S 2009, ‘Reciprocal altruism as the basis for contract’, University of Louisville Law Review, vol. 3 no. 4, pp. 489-493.
McKendrick, E 2005, Contract law- text, cases and materials, Oxford University Press, North Melbourne.
Randy, E 2003, Contracts, Aspen Publishers, New York.
WWahlberg H & Servanda, P 2001, ‘Contract’, The American Journal of International Law, vol. 53 no. 4, pp.775-779.
Welber, J et al., 2009, Law of contracting, Oxford University Press, North Melbourne.
Willmolt, L & Dixonr, B 2009, Contract law, Oxford University Press, North Melbourne.