What is a contract and why you should care

In this article Dr Maria Anassutzi, Intellectual Property Expert and Director of Anassutzi & Co Limited, explains the key reasons business owners, directors and commercial managers need to know what a contract is and why it is important for them to know and have the basic understanding of a contract and its impacts on business.

As a business owner, director, manager you enter almost daily into legally binding contracts. The contracts may be in the form of placing orders or accepting them, purchasing and selling via your standard terms and conditions, or via your sales staff who may be a little bit over zealous trying to conclude the deal or by agreeing a letter of intent, outsourcing part of your operations or supply chain or commissioning a specific work, be it software, logo or marketing campaign.

This means contracts have not only legal implications but also commercial impact since they may unnecessarily increase your business exposure, affect your company’s liabilities and eventually your business turnover and profit. It would therefore be good if you and staff working for you knew how to avoid taking on extra responsibilities and liabilities and may cause you to be liable for misrepresentation, expose your company to unmanageable risks and ensuring that payment or receipt of goods or services goes smoothly. Of course even with the perfect agreement you cannot eliminate all risks. What you can do is ensuring that you know the risks you are taking and act accordingly be it by taking out the necessary insurance cover or pricing your product and services accordingly. Of course, you could ask your lawyer for assistance but very often you do not have the budget and you are expected to conclude contracts as part of your business, therefore engage a lawyer is not an option. However you can attend Anassutzi & Co Drafting Commercial Contracts seminar which gives at an affordable price all the necessary tips and hints for you to do your job plus lots of checklists and other materials.

A contract is a legally enforceable agreement giving rise to obligations for the parties to it. The formation of a contract is complete when the basic principles of offer, acceptance, consideration and intention to create legal relations are satisfied (the four basic elements). An agreement is formed through offer by one party with acceptance of that offer by another party. This involves a matching of the two communications of offer and acceptance.

When a contract is formed through standard terms and conditions of business (sale or purchase) if both parties purport to impose their own standard terms, difficulties arise in determining which terms will prevail. The approach taken by the courts is that an acceptance which attempts to impose new terms is not an acceptance at all, but is a counter-offer which can be accepted by an unequivocal acceptance by the other party, or by performance. This is known as battle of the forms and means in practice that the last set of terms dispatched before acceptance or performance (the last shot fired in the battle of the forms) will prevail.

Some contracts may be written, or oral, or partly written and partly oral. Other contracts may need to be written or by deed to be legally enforceable. In the past, courts have found that contracts do not always have to be signed. Even though the parties to a contract had not executed the draft agreement that had been drawn up, and they had initially intended that it should not be binding unless and until the agreement was executed, the contract was binding on the parties as, on the evidence, they had been acting in accordance with the contract’s terms and they had, on the facts, effectively decided that the agreement did not have to be executed after all. However, this decision was overturned on appeal on the construction of the facts.

In another case, the Court of Appeal held that a counterparts clause prevented a contract from being formed, even though the parties had performed a substantial part of the contract. However, this decision was overturned in March 2010 by the Supreme Court, which held that although the parties never signed the formal written agreement, that agreement had come into effect notwithstanding that the agreement was expressed to be subject to contract. The parties had by their conduct waived the subject to contract provision. Lord Clarke commented that “the different decisions in the High Court and Court of Appeal and the arguments in the Supreme Court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done”.

The moral of the story to is to “agree first and to start work later.” Businesses may not always find it possible to do so, but should be aware that behaviours, words and promises have all impact and cause implications that have commercial and financial consequences. Attending Anassutzi & Co Drafting Commercial Contracts seminar is the best and simplest way of doing so.

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2010 Anassutzi & Co Limited. All rights reserved.