What is the value of a commercial contract?
Every time you or your business agrees to take some action, make a payment in exchange for anything of value, or provide products or services for payment, you have created a contract. Contracts are also known as agreements, terms and conditions, purchase orders, bills of sale, leases, or employment agreements. Contracts can be verbal or written providing they contain the four essential elements of a contract. However, a verbal contract is much more difficult to prove. Some types of contract such as those for buying or selling real estate and credit, must be in writing.
A written agreement is recommended because it becomes your proof of what was agreed upon, prevents ambiguity or misunderstanding, and prevents either party forgetting or changing the terms later. A written contract also makes the parties focus on the essential issues and come to a definite agreement.
Unless you’re a lawyer nobody expects you to write your own contracts. However, as a business owner, you’re expected to be able to read a contract and understand what it means. This section provides a brief introduction to the basics of contracts. Keep in mind that you should always obtain legal advice before signing a significant contract.
What is a contract?
A contract is a legally binding agreement between two or more parties that creates an obligation to do, or not do, particular things. This means that the obligations of each party set out in the contract are enforceable.
The process for creating a contract generally includes information exchange, discussion, negotiation, and making and accepting offers. The question is, when does all the discussion and negotiation become a legally binding agreement?
A contract is formed when the four essential elements are present:
offer;
acceptance;
the intention to create legal relations; and
consideration.
A contract is formed at the moment when the parties assume contractual obligations and the risk of liability if the terms of the contract are breached.
Even if the four essential elements are present a contract could be invalid if:
It is an illegal contract. Examples of illegal contracts are an agreement to commit a crime and an agreement that breaches legislation, such as unconscionable conduct under the Competition and Consumer Act 2010. The person or entity lacks the capacity to enter into the contract. Examples of persons where lack of capacity could be an issue are minors and bankrupts. The contract involves misleading or deceptive conduct, mistake, duress, undue influence, unconscionable conduct or other categories that at law can cause the contract to be avoided.
What are the essential parts of a commercial contract?
Any terms and conditions that you use should be tailored to the needs of your business. Generally any contract for goods or services should address:
the description of goods or services being supplied
the price and payment structure
the delivery details, including the time, place and who is responsible for delivery
the rights of either party to terminate the contract
limitation of liability provisions
confidentiality provisions, particularly if the contract is of a sensitive nature
confirmation of which country’s laws apply to the contract