Business Contracts

Introduction:

Businesses usually have to enter into agreements with their customers, suppliers, service providers and employees
and also strategic partners in the course of doing business. These agreements will outline the rights and obligations
of each party to the agreement. The business agreements are legally referred to as contracts.

A contract is a voluntary arrangement between two or more parties that is enforceable at law as a
binding legal agreement. In common law legal systems, a contract (or informally known as an agreement in some
jurisdictions) is an agreement having a lawful object entered into voluntarily by two or more parties, each of whom
intends to create one or more legal obligations between them.

What is a business to business contract?

A business contract is a legally binding agreement between two or more parties to do or not to do certain things.

Examples of Business Contracts

1. Sale of goods or services

2. Hire purchase agreement
3. Employment contract
4. Tender award and executing it
5. Leasing or renting of business premises and other facilities

What does it mean for a contract to be binding?

The definition of a contract is a legally binding, and enforceable by law, agreement made between two or more
parties. In cases of dispute when the parties are arguing whether a contract, or fundamentals of it, have been
broken, it may be required to take the case before the courts. This allows the judgement to be made about
whether there has been a “breach of contract”. The judges will have to look at certain criteria before deciding
whether or not a contract has been breached and is enforceable.

What are the elements/essentials of a valid contract?

Elements of a Contract. The requisite elements that must be established to demonstrate the formation of a legally
binding contract are (1) offer; (2) acceptance; (3) consideration; (4) mutuality of obligation; (5) competency and
capacity; and, in certain circumstances, (6) a written instrument.

Offer:

In the contract there must be a definitive and clearly stated offer to do something. E.g. a quote to offer a lease.
There will be a time frame usually written into the contract. It has to be precise, an offer does not include
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estimates, proposal requests, expressions of interest, or letters of intent.
An offer will lapse: – when the time for acceptance of the offer expires or if the offer is withdrawn before it is
accepted; or after a reasonable time in the circumstances (usually the greater the value of the contract, the
longer the life of the proposal).

An offer is a promise to act or refrain from acting, which is made in exchange for a return promise to do the same.
Some offers anticipate not another promise being returned in exchange but the performance of an act or
forbearance from taking action. For example, a painter’s offer to paint someone’s house for $100 is probably
conditioned on the homeowner’s promise to pay upon completion, while a homeowner’s offer to pay someone $100 to
have his or her house painted is probably conditioned upon the painter’s successfully performing the job. In either
case, an offeree’s power of acceptance is created when the offeror conveys a present intent to enter a contract in
certain and definite terms that are communicated to the offeree.

Courts distinguish preliminary negotiations from formal legal offers in that parties to preliminary negotiations lack
a present intent to form a contract. Accordingly, no contract is formed when parties to preliminary negotiations
respond to each other’s invitations, requests, and intimations. Advertisements and catalogues, for example, are
treated as forms of preliminary negotiations. Otherwise, the seller of the goods or services would be liable for
countless contracts with consumers who view the ad or read the catalogue, even though the quantity of the
merchandise may be limited.

However, sellers must be careful to avoid couching their advertisements in clear and definite terms that create
the power of acceptance in consumers. For example, sellers have been found liable to consumers for advertising a
definite quantity of goods for sale at a certain price on a “first come, first serve” basis, after consumers showed
up and offered to pay the advertised price before the goods sold out. In such situations, the seller may not
withdraw the offer on grounds that market factors no longer justify selling the goods at the advertised price.
Instead, courts will compel them to sell the goods as advertised.

The rejection of an offer terminates the offeree’s power of acceptance and ends the offeror’s liability for the
offer. Rejection might come in the form of an express refusal to accept the offer or by implication when the
offeree makes a counteroffer that is materially different from the offeror’s original proposal. Most jurisdictions
also recognize an offeror’s right to withdraw or revoke an offer as a legitimate means of terminating the offer.

Offers that are not rejected, withdrawn, or revoked generally continue until the expiration of the time period
specified by the offer, or, if there is no time limit specified, until a reasonable time has elapsed. A reasonable time
is determined according to what a reasonable person would consider sufficient time to accept the offer under the
circumstances. Regardless of how much time has elapsed following an offer, the death or insanity of either party
before acceptance is communicated normally terminates an offer, as does the destruction of the subject matter of
the proposed contract and any intervening conditions that would make acceptance illegal.

Sometimes offerees are concerned that an offer may be terminated before they have had a full opportunity to
evaluate it. In this case, they may purchase an “option” to keep the offer open for a designated time. During that
time the offer is deemed irrevocable, though some jurisdictions allow the offeror to revoke the offer by paying
the offeree an agreed upon sum to do so.

Acceptance:

Only what is offered in the contract can be accepted. The terms and conditions of the proposal must be accepted
exactly as they are proposed in the contract. If prior to an agreement any new terms are suggested, this is
regarded as a counter offer which can be accepted or rejected. This may occur a few times before an agreement is
reached and accepted. It is irrelevant who makes the actual final offer; it is the acceptance of the proposal that

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brings all the negotiations to an end by establishing the terms and conditions of the contract.
Acceptance may be given in writing, verbally or inferred by action which clearly indicates acceptance (performance
of the contract). Whatever the circumstances the agreement must conform to the method accepted by the
offerer for it to be effective and legal.

Intention of legal consequences:

A contract necessitates that the parties involved are intending to enter into a legally binding agreement. All
parties must acknowledge that they are obliged by law to adhere to the contract and that the agreement can be
enforced by law. The intention to create legal relations is recognized by all, so the contract doesn’t have to state
that you understand and intend legal results to follow as this is presumed upon entering the contract. If all the
parties to a contract agree and determine that the contract is not to be legally bound, this must be clearly stated
in the contract for it not to be legally enforceable.

Consideration:

In order for a contract to be binding it must be reinforced by valuable consideration. That means one party
promises to do something in return for a promise from the other party to provide a benefit of value (the
consideration). The consideration is basically a trust agreement between the parties as the agreed price for the
other’s promises. This is usually accepted in monetary values, but isn’t always; it can be anything of value including
the promise not to do something, or to refrain from exercising some right.

Each party to a contract must provide something of value that induces the other to enter the agreement. The law
calls this exchange of values “consideration.” The value exchanged need not consist of currency. Instead, it may
consist of a promise to perform an act that one is not legally required to do or a promise to refrain from an act
that one is legally entitled to do. For example, if a rich uncle promises to give his nephew a new sports car if he
refrains from smoking cigarettes and drinking alcohol for five years, the law deems both the uncle’s promise and
the nephew’s forbearance lawful consideration.

A court’s analysis as to whether a contract is supported by sufficient consideration typically focuses more on the
promise or performance of the offeree than the promise or performance of the offeror. Courts often say that no
consideration will be found unless the offeree suffers a “legal detriment” in making the return promise or in
performing the act requested by the offeror. As a general rule, legal detriment is found if the offeree relinquishes
a legal right in fulfilling his or her contractual duties. Thus, promises to give love and affection or make a gift or
donation are not sufficient consideration to support a contract because no one is under a legal duty to give or
refrain from giving these things to others. Similarly a promise to perform an act that has already been completed
in the past fails to offer consideration to support a new agreement.

Mutuality of Obligation
Closely related to the concept of consideration is the mutuality of obligation doctrine. Under this doctrine, both
parties must be bound to perform their obligations or the law will treat the agreement as if neither party is bound
to perform. When an offeree and offeror exchange promises to perform, one party may not be given the absolute
and unlimited right to cancel the contract. Such arrangements attempt to allow one party to perform at her
leisure, while ostensibly not relieving the other party of his obligations to perform. Most courts declare these one-
side arrangements null for lack of mutuality of obligation. Some courts simply invalidate such contracts for lack of
consideration, reasoning that a party who is given absolute power to cancel a contract suffers no legal detriment.

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To avoid having a contract subsequently invalidated by a court, the parties must be careful to limit their discretion
to cancel the contract or otherwise not perform. As long as the right to avoid performance is dependent on some
condition or event outside the control of the party seeking to cancel the contract, courts will find that mutuality
of obligation exists. Thus, a farmer might lawfully be given the right to cancel a crop-watering service if the right
to cancel were conditioned upon the amount of rain that fell during a given season, something outside the farmer’s
control. But a court would find mutuality lacking if the farmer were given the right to terminate the service short
of full performance simply by giving notice of his or her intention to cancel.

Competency and Capacity

A natural person who enters a contract possesses complete legal capacity to be held liable for the duties he or she
agrees to undertake, unless the person is a minor, mentally incapacitated, or intoxicated. A minor is defined as a
person under the age of 18 or 21, depending on the jurisdiction. A contract made by a minor is voidable at the
minor’s discretion, meaning that the contract is valid and enforceable until the minor takes some affirmative act to
disavow the contract. Minors who choose to disavow their contracts entered may not be held liable for breach. The
law assumes that minors are too immature, naïve, or inexperienced to negotiate on equal terms with adults, and
thus courts protect them from being held accountable for unwisely entering contracts of any kind.

When a party does not understand the nature and consequences of an agreement that he or she has entered, the
law treats that party as lacking mental capacity to form a binding contract. However, a party will not be relieved
from any contractual duties until a court has formally adjudicated the issue after taking evidence concerning the
party’s mental capacity, unless there is an existing court order declaring the party to be incompetent or insane.
Like agreements with minors, agreements with mentally incapacitated persons are voidable at that person’s
discretion. However, a guardian or personal representative may ratify an agreement for an incapacitated person
and thereby convert the agreement into a legally binding contract.

Contracts entered into by persons under the influence of alcohol and drugs are also voidable at that person’s
discretion, but only if the other party knew or had reason to know the degree of impairment. As a practical matter,
courts rarely show sympathy for defendants who try to avoid contractual duties on grounds that they were
intoxicated. However, if the evidence shows that the sober party was trying to take advantage of the intoxicated
party, courts will typically intervene to void the contract. Persons who are intoxicated from prescription
medication are treated the same as persons who are mentally incompetent or insane and are generally relieved from
their contractual responsibilities more readily than are persons intoxicated from non-prescription drugs or alcohol.

Writing Requirement
Not every contract need be in writing to be valid and binding on both parties. But nearly every state legislature has
enacted a body of law that identifies certain types of contracts that must be in writing to be enforceable. In legal
parlance this body of law is called the statute of frauds.

Named after a seventeenth-century English statute, the statute of frauds is designed to prevent a plaintiff from
bringing an action for breach of contract based on a nonexistent agreement for which the only proof of the
agreement is the plaintiff’s perjured testimony. The statue of frauds attempts to accomplish this objective by
prohibiting the enforcement of particular contracts, unless the terms of the contract are expressly reflected by
written note, memorandum, or agreement that is signed by the parties or their personal representatives.

As originally conceived, the statute of frauds applied to four types of contracts: (1) promises to pay a debt owed
by another person; (2) promises to marry; (3) promises to perform an act that cannot possibly be performed within
a year from that date of the promise; and (4) agreements involving real estate. However, most states have since

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expanded the class of contracts that must be in writing to be enforceable. For example, in many jurisdictions long
term leases, insurance contracts, agreements for the sale of securities, and contracts for the sale of goods above
a specified amount are unenforceable unless the terms of the parties’ agreement are memorialized in writing.

The Terms and Conditions:

If, for any reason, there is a dispute over a contract, it is brought to the courts to be dealt with legally then the
courts will have to look in detail at the terms and conditions that surrounded the contract. A contract cannot be
said to be complete if the terms and conditions were unclear. However, it needs to be recognized that every court
case is unique, and a judge may have to try to clarify the exact terms and conditions linked to the disputed
contract, rather than a simple decision on whether the contract has been broken or not.

“Breach of Contract”:

A breach of contract occurs when one of the parties in the agreement fails to fulfil one or more of the specified
terms and conditions. A violation can also be determined if some agreed work carried out is malfunctioning or sub-
standard; or if one party has not carried out the agreed work. This is then placed in the hands of the law where a
judge will determine if the contract has been breached and damages may be awarded to one of the parties.

The law relating to contracts can be comprehensive and complex, serious consideration should be given before
taking any legal action. Harold stock & Co have specialized qualified solicitors who are confidently able to advise
and guide you. We assure you that all work is confidential and we will advise you without any misconception of an
outcome.