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Quick Guide: Why properly written contracts are vital in avoiding future legal disputes

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Business at all levels is underpinned by contracts. These can range from simple verbal agreements for low value transactions through to complex and detailed written agreements between corporations and governments. To save on the risk of future avoidable legal actions, writing a contract that is suitable for the transaction or agreement is key. A contract is a pledge, between two or more parties (be they individuals or organisations), that is legally binding. It is designed to the fulfilment of commitment in exchange for something of value. Whilst some contracts may be made verbally, there are some that must be in writing, such as for a property transaction.

Contracts – why are they important?

A contracts is designed to make sure that ensure that your position and interests are protected by law and that both parties understand that there is a clear and written record that they need to fulfil their obligations in the agreement. If any party to a contract is in breach of the contracts conditions, then there are usually a number of solutions – or ‘remedies’ – outlined to resolve such breaches.
A well written contract that is appropriate for your needs is very important. Should a disagreement between parties occur, which can happen if the contract terms are unclear or not relevant, then ultimately it will be a court of law that will decide.

The 4 main parts of a contract

For a contract to be valid, it must have four key parts: agreement, capacity, consideration, and intention.

Agreement & Offer
An agreement happens when an offer is made by 1 party to the other, and that offer is accepted. An offer is a statement of terms which the person making the offer is prepared to be contractually bound to. An offer is different from an invitation to treat which only invites someone to make an offer, and is not intended to be contractually binding. For example, advertisements, catalogues and brochures where prices of a product are listed are not offers but invitations to treat. If they were, then the advertiser would have to provide everyone who 'accepted' them with the product regardless of stock levels.

Acceptance
Acceptance of the offer must be unconditional (eg via a signature) and it must be communicated. Any negotiations between the parties are counter-offers, not acceptance. Doing nothing is not generally considered acceptance, unless it is clear that acceptance was intended (eg by way of conduct, like paying for a product). What constitutes as adequate acceptance will vary depending on the type of contract.

Capacity
All parties must have the ability to understand the terms of and any obligations under the contract. Also, consent to the contract must be freely given (eg there cannot be any coercion/force, fraud, undue influence, or misrepresentation).

These type of people generally lack the capacity to enter into contracts:

• children under 18 - unless the contract is for necessities (food and clothing) or education (an apprenticeship or employment contract) and the terms are fair and benefit the child
• people suffering from mental health conditions or under the influence of drugs and/or alcohol - only if the condition affects the person's ability to understand the nature of the transaction or if the other party is aware of their incapacity
If a person lacking capacity has entered into a contract, it will generally be up to that person to decide if they want to invalidate the contract.
Consideration
Parties must exchange some value for a contract to be binding. This is called consideration. Consideration does not have to be adequate or for the benefit of the other person, it merely has to be sufficient (eg if someone offers to sell their house for nothing, there is no consideration; but if they offer to sell it for £1, then there is valid consideration).
Examples of insufficient consideration include:
• an existing public duty (eg a police officer's duty to protect the public) or contractual duty (eg the production of services already required by another contract)
• something with sentimental value only
• something that occurred before the contract - consideration must move from the contract (eg a gift received in January cannot be consideration for a contract entered into in October)
• anything illegal

Intention

Not all agreements between parties are contracts. It must be clear that the parties intended to enter into a legally binding contract. In the case of business agreements, the general assumption is that the parties intended to enter into a contract.
In social situations, there is generally no intention for agreements to become legally binding contracts (eg friends deciding to meet at a specific time would not constitute a valid contract). It is up to the person who wants the agreement to be a contract to prove that the parties actually intended to enter into a legally binding contract.

Commercial Litigation Funding

If you are thinking about taking legal action against another individual or company but are worried about the costs involved, Advantage Litigation Services have the skills and expertise to help you find a way of funding commercial litigation without risking your personal finances or those of your business. Click here to contact us today or call 0800 160 1298 to see how we can help.

 

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