What is a Contract?
A contract is a legally binding agreement which governs the relationship between two or more people or companies, outlining their responsibilities to each other.
Nearly all the commercial relationships and transactions we enter into are regulated by a contract.
Contracts can be oral or written. However, it’s sensible to have any agreement in writing, as it minimises misunderstandings and results in fewer disputes. The problem with an oral contract is that it may be difficult to prove exactly what was agreed to, or if the contract existed at all.
Elements of a Contract
- Offer: this is made when you decide to buy something and offer to pay a price. You could also offer to give something or do something in return
- Acceptance: this is done by the seller agreeing to supply the goods or services. The acceptance may be in words or an action (eg. if you signed a written agreement accepting the terms and conditions)
- Consideration: this is the value (usually money) that is given in return for the goods or services offered to be supplied or acquired. It may also be the promise to pay at a later date after certain events occur or procedures are followed.
Who can enter a Contract?
Contracts are usually between two or more people or companies (or both).
Anyone over the age of 18 can enter a contract. In some circumstances people under 18 can do the same.
Once a contract has been signed, neither party can change their mind, both parties are bound to honour the agreement. If either party wishes to pull out of the contract, they could end up paying a penalty or be taken to court by the other party to recover their losses.
Be aware that despite what is in the contract, there may be terms and conditions outside the agreement that the law imposes. For example, it’s no use having a clause saying ‘no refunds’ when the law actually gives people a non-excludable right to a refund under certain circumstances.
The Essential Contract Checklist
Before signing a contract the parties involved should:
- Be certain they understand what they are signing for. If in doubt, take time to consider the contract carefully
- Read every word – including the fine print
- Don’t be pressured into signing anything. If necessary, take the contract home overnight and read it through
- Make sure that all parties initial any changes that are made to the contract they sign
- Always get a copy of any contract they sign.
- Seek legal advice if you don’t understand the contract
What happens if someone breaks a contract?
If someone breaches the terms of a contract, a court might do one of the following:
- Award a sum of money to compensate the innocent party for their loss, known as damages
- Order the party in breach to stop
- Order the party who has breached the contract to carry out their obligations
- Declare the contract void and order the party in breach to do what it takes to put the innocent party in the same position they were in before they signed the contract.
The court or tribunal will decide which of these remedies to use based on the type of contract and also the type of breach.
Download the Universal Basic Contract Template Now.