Why is it important to have a commercial contract?

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Contracts are of significant importance to the business and are a necessary component of your business’ short, medium and long-term success. Having a contract in place is a sure way of securing yours and your business’ interests, assets and intellectual property.
Why is it important to have a commercial contract?

Contract law is governed by a combination of domestic statues, European laws (Directives and Regulations) and the case law jurisprudence. Therefore, it can be understandably tricky for business owners to figure out when/how contracts are formed and how to enforce contracts. That’s why we are providing you with some pointers to guide you in the right directions which are set out below:

What is a Contract?

A contract is an agreement, that is legally enforceable, between two or more parties, which sets out their rights and legal obligations under the contract. The contract does not have to be in writing and signed by all parties; a contractual agreement can also be formed verbally between two or more parties. A contract is essentially a set of commitments or covenants that the contracting parties enter into whereby one party offers to provide something, for example a product or service (usually referred to as an ‘offer’),  in exchange for money or some other form of benefit (usually called a ‘consideration’).

How is a contract formed?

A binding contract is formed when an offer is made by one party to another in exchange for a consideration. For example, you walk into an apple store with a view to purchasing a new laptop. The laptops on display at the Apple store are offers (‘an offer’) which are also referred to as an ‘invitation to treat’. You choose a laptop and inform an Apple store assistant that you wish to purchase that laptop. At this point you accept Apple’s offer (‘Acceptance’) in relation to the price of laptop as well as the terms of the purchase such as warranties. You are then presented with a brand new laptop and you proceed to pay the agreed price. Your payment for the laptop is what is usually referred to as a consideration (‘Consideration’).

How can a contract be legally binding?

For a contract to be legally binding it must contain the following three elements:

  1. An agreement to form a contract;
  2. An intention on the part of each party to the agreement to form a legally binding relationship; and
  3. Consideration: i.e., payment.

It is important to note that an agreement can be oral or in writing. However, for the sake of practicality it would be prudent to have your agreements clearly written down as clear evidence of each party’s intentions in the event of a dispute at some later point.

An intention to create a legally binding contract requires that the contracting parties must intend to enter into a set of agreements where both rights and obligations are legally enforceable. An intention to create a legally binding contract can be implied when a written contract is agreed upon and signed by both parties. However, in the event that a contract is orally agreed, the intention of the parties can be discerned from the wider circumstances and the environment in which the alleged agreement had taken place. For example, two parties who have attended a series of formal business meetings in professional surroundings and in the presence of their legal representatives could be said to have had an intention to create a legally binding relationship.

When is a contract not enforceable?

A contract may not be enforceable if it lacks any of the key elements – as set out above – that render a contract an enforceable agreement in the first place. However, there are circumstances where a seemingly binding contract may not enforceable, which are as follows:

  • Duress: one or more parties enter into a contract under duress;
  • Lack of capacity: one of the parties to the contract did not have the mental capacity to agree to the terms of the contract at the time of the agreement;
  • Misrepresentation: one party entered into contract on the basis of misrepresentation made by another contracting party;
  • Non-disclosure: materials facts relating to the contract were not disclosed to contracting parties.
by Mahshid Javaheri
Mahshid Javaheri

After working as a solicitor for 3 years, Mahshid joined Legafit.com as an Editor and contributor of legal content. Mahshid is passionate about connecting practicing lawyer with the wider business community; she helps lawyers create and distribute insightful and actionable legal content that delivers value to businesses, whilst showcasing the lawyers’ expertise.

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