In business, one deals regularly with contracts. While contracts may require a legal expert to evaluate the various elements, everyone should have an idea of what those elements are and a brief explanation of them. It myay still be worthwhile to get a lawyer or solicitor to check the details but even a layman should have a good idea of what makes up a good contract.
What is a contract?
It is a legally binding or valid agreement between two or more parties.
Some contracts must be in written form. Real estate, which incorporates the transfer of property from one owner to another, must have a full legal description of the property (boundaries, usage, easements and more) as well as identifying the seller and the buyer, plus various additional clauses. Different countries require other transactions to be covered by written contracts.
Some, usually small transactions, can be done simply with a handshake to signify the agreement and the straight exchange of “considerations” or promises. There would be little paperwork involved, probably only receipts
However, all contracts, written or verbal, must have specific elements. No matter how simple the contract, the following items must be present
Offer and acceptance
An offer is not just a willingness to deal or negotiate. It is a definite promise to be bound to the agreement, provided the offer is accepted on all of its terms.
Acceptance is agreement that the offer is fair to the accepting party and that the terms are understood as they stand.
The “terms” mentioned in the above paragraphs are the “small print.” Many people ignore them because they are standard or stated to be standard. Whether you are making the offer, or accepting the offer, be sure you read all the terms as they contain the details that you are agreeing to, even with small purchases. Make sure you agree with them and understand them.
Any change to the terms in the offer creates a counteroffers, rather than acceptance. A counteroffer negates the original offer, no matter how small the changes are. If you don’t agree with the terms, recognise that you are making a counteroffer and that the original terms no longer hold.
While the offer constitutes a promise, the person making the offer can, until it is accepted, withdraw the offer. This must be conveyed to the other party before the acceptance of the offer.
Intention to create a legal relationship
Most contracts have two parties. One is the buyer and the other is a seller. This is a legal relationship and can go well beyond the original transaction. If you are buying something, then the terms may include how you can on-sell the object.
Buying a book, for example, you agree that if you sell it after the purchase, you will sell it intact with the cover and all the copyright and legal statements in it. Often, when you buy a recording, you are agreeing that you will not make a copy of the item or that the copy you make is yours only while you hold onto the original. Your holding onto the original is part of the legal relationship you have with the producer.
Areas such as these are part of the terms you agreed to when you bought.
Considerations
A contract is usually about exchange of values. It is presumed that the parties agree to the equivalence of the values.
So, if you agree to pay $100 for something, then you and the other party (the seller) agree that this something is worth $100 of your money.
If you barter, say, a cow for ten fowl, then the same principle holds.
It is always presumed that the considerations are legal and not impossible to fulfil, even if they seem rather one-sided. However, one needs to be careful; the transaction cannot be intended to cheat someone else, so if you want to sell your house after a divorce so that your ex-spouse does not benefit, you may be doing something illegal.
Legal capacity
This is an element that can cause a lot of problems if not handled properly. Watch out for the following groups which might involve problematic consent (consent being the next element shown below.)
(a) people with mental impairment
(b) minors (below the age of majority or consent)
(c) bankrupts
(d) corporations (or people acting on behalf of a company)
(e) prisoners
While these groups do have the right to enter into contracts, these rights may be restricted.
Often, the legal capacity question arises after the contract is in place, and this can be costly to rectify. So it is advisable to be very careful when you are dealing with people in these groups.
Consent
Contracts involve free will and proper understanding of what each party is doing. The consent of each party must be genuine. Generally, there are four concerns in determining proper consent:
(a) Mistakes. Mistakes must go to the basis of the agreement/contract. This means that there are very few circumstances that can allow either party in the agreement to claim a mistake was made. It is an area that can take long legal proceedings to prove that the mistake was genuine.
(b) False statements. The severity of a false statement can be a condition of the contract; if false, it can invalidate the contract. If the statement in question is taken out of the contract, there would be no contract. Also included in this category are misrepresentations; these fall into three main types being negligence leading to a misrepresentation, fraudulent misrepresentation and “innocent” misrepresentation.
(c) Duress. This might be physical (for example, threats of violence) or economic (threats to withdraw business).
(d) Undue influence (or unconsionability). This area is difficult to show, and requires a fair amount of investigation.
Whether you are making the offer or taking the offer, be aware of the fact that consent is your responsibility.
Illegal and void contracts
Often, contracts have riders that state the geographic area whose laws cover the agreement. This element is not easy to summarise, but it should always be kept in mind.
The basic summary is that contracts are legal agreements. Whether written or verbal, they are binding unless you can prove that one of more of the six elements were not present in the making of the agreement. If you do not understand what you are agreeing to, then get legal advice in your specific area. Where possible, get the agreement in writing and include as much as possible in the details, specifically the terms of the contract.
When you deal with the legal side, get the explanations written down so that you can prove what you say about your understanding. Write down in plain language what you understand, based on the elements identified above.
Doing so can save you a lot of legal effort if things do not go well. Otherwise, many of the problems can’t be documented and hence may depend on basic hearsay and hearsay is not proof of anything in law.