No matter what industry you are in, you can't do business on your own and so every company has to have various agreements and contracts in place.
These agreements are often between you and your customers, employees, suppliers or distributors, and the way all these business agreements are enforced is by creating legally binding contracts between the parties involved.
Unfortunately, all too often when things start to go wrong we see businesses suddenly take an in depth look at their agreements only to find that they have an legally unenforceable contract or the agreement they signed doesn't cover what everyone thought it did.
It doesn't matter what kind of formal transaction it is, whether it's an employee contract, partnership agreement, purchase order, or any other business arrangement, the agreement must be recognised legally by the courts for it to be enforceable if someone were to challenge it.
This is why it's important to understand the key components of a legally binding contract when drafting an agreement.
Key Components and Unenforceable Contract Terms.
Offer and Acceptance of an agreement
A legally binding contract must include one party making a valid offer and the other party accepting it.
An offer is not quite the same thing as an invitation to make a deal, such as putting out a request to tender. A tender request for example, would not be recognised as an offer in English contract law. The offer that is accepted must be the exact terms of the offer being made. If the exact terms are not the terms being accepted, it would be considered a counter-offer, which the initial offeror must then agree to.
Intention to be legally bound
All parties agreeing to the contract must intend to be bound by the contract.
There is presumed intention to be bound with commercial agreements, unless there is what's known as an 'honour clause' in the contract that states otherwise. A court will look through all the factual and circumstantial evidence to determine if this is the case. It is therefore presumed both you and the business you represent have the intention to be bound to any agreements entered on behalf of the business entity.
Consideration and a 'Bargain'
Unfair Contract Terms
An often-seen unfair term is an 'exclusion clause' where one of the parties attempts to avoid the liability that comes as part and parcel of a contract.
Another common example of an unfair term are 'penalty clauses' where one party specifies a monetary amount that is payable upon breach of the contract which is disproportionate to the loss that the party would actually suffer due to that breach.
Does an agreement have to be in writing to be enforceable?.
Steps to consider when reviewing a contract.
Ensure a contract does what you think it does
Enforceability aside, a common issue that arises after a contract is signed is that the terms of the contract don't actually do what one of the parties thought it did.
It can be too easy to assume that what was agreed verbally has been translated perfectly into a written agreement. Often this isn't the case, and a party can be caught out by relying more of the 'sentiment' or 'spirit' of what was discussed rather that what made it into the written contract.
Add a Dispute Resolution clause
Hope for the best but plan for the worst.
Inserting a dispute resolution clause into a contract defines how the parties will seek to resolve differences or misunderstandings before they happen. To avoid litigation, a dispute resolution clause can point towards independent mediation or arbitration to settle the dispute in a fair and mutually agreeable way.
Proactively reviewing your contracts
It can be difficult for business owners and the uninitiated to draft a legally binding contract that covers what they want as well as protects their position. Therefore, it is always best that you have a solicitor draft or at least review your business contract before getting it signed.
Just don't wait until you need to enforce a contract before checking that it does what you need it to!
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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